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Government Tries to Boost the Gold Monetisation Scheme Amidst Fall in Imports and Rising Gold Price

04 August 2020

 

We are a gold-obsessed nation.

 

India imports 800-900 tonnes of gold each year (officially that is, but we’ll come to that later), making us the second-largest gold consumer globally after China. We are the largest jewellery manufacturing hub as well.

 

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Gold imports however plunged 94% to $688m during the first quarter of 2020-21 vs $11.5bn in the corresponding period last year, on the back of significant fall in demand in the wake of the COVID-19 pandemic.

 

 

Till Gold Do Us Part

And amidst this crash, the Government is mulling ways to tap into the idle gold lying with Indian households, and turn this unused gold into an asset which jewellers, banks, NBFCs and other lending institutions could monetise.Private gold stock in India is estimated at 25,000 tonnes which is worth ₹110Lcr ($1.4trn).

 

All Gold Doesn’t Glitter

We earlier mentioned India imports around 800-900 tonnes of gold annually, officially. However, another 150-200 tonnes of gold enters illicitly, that is, through smuggling. As per a report by Impact, a Canada-based NGO, on 'How India Became One of the World's Largest Gold Smuggling Hubs', illegal export of gold just from the Great Lakes region of Africa and United Arab Emirates (UAE), grew from some five tonnes per year in 2007 to more than 22 tonnes per year by 2012.Illicit gold, after entering India, is absorbed into the legal market, and is re-exported as jewellery, as per sources. For every 5 kg of gold that comes into India, almost 1 kg goes back out as jewellery.

 

The Finance Ministry is reportedly working on a gold amnesty scheme for people with unaccounted holdings of the precious metal. As per reports, under the proposition, the Government plans to ask people with unaccounted holdings of the metal to declare it to tax authorities and pay levies plus penalty.

 

 Revamping the Gold Monetisation Scheme

Some other proposals, include tweaking the Gold Monetisation Scheme (GMS) introduced in Budget 2015-16 to make it more attractive.The initiative, which allowed households to deposit a minimum of 30 grams of gold for up to 5-15 years and earn 2.25%-2.50% interest on it, has hardly made a dent with banks accumulating a measly 20 tonnes till date (compared to estimated holdings north of 25,000 tonnes).

 

Within this backdrop, the Gem & Jewellery Export Promotion Council (GJEPC) has proposed that the Government should link the scheme with the Income Tax Act which states that gold jewellery to the extent of 500 grams per married women, 250 grams per unmarried women and 100 grams per male member of a family need not be seized. Subsequently, industry experts feel that these limits fixed nearly three decades ago should be revised to 1 kg, 500 grams and 200 grams, respectively. Some others have suggested the reduction of the minimum deposit to 10 grams instead of 30 grams.The deposit certificates under GMS should be made tradable, such that they are given the feature of liquid instruments, some opine.

 

As per a member of the Indian Bullion & Jewellers Association, a vital reason why the gold deposit scheme is languishing is 7-14% loss of principal amount (and the interest) on account of making charge and process loss. An improved GMS should therefore consider a way to compensate for this, maybe through higher interest rates.As the Government mulls ways to incentivise people to part with their gold, here’s a snapshot from an older article to give a sense of why they usually don’t want to.

 

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Source:https://transfin.in/govt-to-boost-go