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GOLD & GOLD SCHEMES IN INDIA
Read more on - Polity | Economy | Schemes | S&T | Environment
- Gold crazy nation: India is a gold-crazy nation, with huge annual demand and consumption of the yellow metal. The problem is that it does not have significant domestic production. So, most of the gold is imported. That is a drain on foreign exchange, and pumps up the current account deficit (CAD). India’s imports are 800-1000 tonnes of gold p.a. Stock of gold in India is estimated to be over 25,000 tonnes, but most of it is neither traded, nor monetized. China too is a large consumer, but with domestic production.
- Three schemes in 2015: The Modi government wanted to change the scenario. It worked on the idea of bringing the gold lying with citizens into the economy, and at reducing India’s dependence on gold imports.
- Let people invest in paper-gold, rather than actual physical gold (hence, Gold Bonds)
- Give people a chance to monetize their idle gold stock (hence, Gold Monetisation scheme)
- Use the physical gold collected from people to mint and sell coins (hence, Indian Gold Coins)
- Benefits: The schemes offer several benefits.
- Absolute Safety – Sovereign gold bonds carry none of the risks associated with physical gold
- Extra Income – Guaranteed annual interest at the rate of 2.50% (on the issue price)
- Indexation Benefit – Transfer of bond before maturity can get indexation benefits
- Tradability – Bonds can be traded on stock exchanges within a specific date
- Collateral – Some banks accept SGB as collateral/security against secured loans
- The thought and the aftermath: The various gold schemes that Modi government introduced were ambitious in scope, and well-designed. Sadly, all have fared fairly poorly compared with their targets over the years.
- Budget data and information provided to Lok Sabha show that the government’s gold schemes in total earned just ?3,451 crore in 2016-17, the first full year of implementation.
- The following year, they earned a paltry ?1,894 crore against a budgeted ?5,000 crore.
- Government estimated it would collect ?5,000 crore each in 2018-19 and 2019-20 but experience has shown that the actual collections have invariably been lower.
- A plus: The annual interest on gold bonds provides a higher return than physical gold, which usually comes with associated making costs. The bonds are also far safer since they are in digital or paper form rather than physical gold, which suffers the risk of impurity and wear and tear.
- Reasons and analysis:
- Physical gold : Some feel the poor response to the Sovereign Gold Bonds (SGB) scheme is because people prefer physical gold. Some find the scheme design faulty and unattractive. As an individual, citizens have the option of putting their money in fixed deposits, corporate bonds, equity, mutual funds, exchange traded funds, liquid funds, and then of buying a gold bond. There is no ‘must-have’ reason to buy a gold bond.
- Jewellery : Demand for gold in India is primarily in the form of jewellery. The argument is SGBs don’t provide an alternative to that but only to those looking for investment options. Physical demand for gold is not shifting to SGBs, and perhaps never will.
- Annual gold consumption : India consumes nearly 800 tonnes of gold and 60% of that as jewellery. About 70% of this 60%, about 340 tonnes, is bought as wedding jewellery. The second large part of jewellery purchases are gifts outside of weddings. These two types of purchases won’t shift to bonds.
- Formalities : Either one needs a demat account to buy, or one needs to do KYC to buy through a fund house. People think that buying a SGB involves a lot of formalities and is very difficult.
- Sales and lock-in : The gold bonds are not available on tap, but as per a predecided schedule. They also come with a lock-in period post-purchase (before redemption).
- Doomed from start: Thus, the government effort to divert people away from physical gold may have been doomed from the start because of Indians’ cultural affinity for gold jewellery. To make the schemes move a bit, the govt. can removing the lock-in and allow on tap sales.
- 2019 was different: The sharp rise in yellow metal’s price led to a big drop in sales, even in festive season in October-November. Experts say that perhaps India is entering a phase where changing demographics in rural areas, greater banking access and different lifestyle choices are playing out.
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