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How New Gold Schemes are Going to Affect Indian Economy

India is among the largest consumers of gold in the world with a high demand due to the socio-cultural importance accorded to the precious metal. Besides, an increase in spending power has further fuelled the demand. According to the World Gold Council, gold consumption in India in the second quarter of the financial year of 2019, has increased up to 13% with a demand of 213.2 tonnes. This has made India the biggest consumer of gold after China for the first time since 2013. The demand for Indian jewellery increased this year because of the wedding season and festive buying coinciding with the comparatively low prices of gold in the months of April and May. Gold is among the top-five imported commodities in India after crude oil and electronics.

High demand for gold and India’s Current Account Deficit (CAD).

What is CAD?

A Current Account Deficit (CAD) is a country’s measurement of trade, which means that the import of trade and services is greater than the value of exported products. To put it simply, CAD widens when imports grow much faster than the exports.

Why high demand for gold has resulted in CAD?

Despite being among the largest gold market with an average demand of around 800 tonnes in a year which accounts for around 25 percent of the world's gold demand, India’s domestic production of gold is minimal. Consequently, the demand is met largely through imports. This large demand on gold imports has an adverse impact on the CAD and further implications on the external sector stability.

Measures to prevent CAD

  • Boosting exports

  • Increasing domestic supply of gold through mining, refining and recycling of gold.

  • Schemes incentivising use of gold as against hoarding .

New gold schemes to improve the economy

The government has introduced two important schemes, the Gold Monetisation Scheme and the Sovereign Gold Bond Scheme, which are expected to positively impact the economy.

What is gold monetisation scheme?

According to various estimates, around 23,000-24,000 tonnes of gold was kept idly with the households and religious institutions throughout the nation. To integrate this unutilized gold in the Indian economy, the Government introduced the Gold Monetisation Scheme (GMS) in the Union Budget of 2015-2016. As part of the scheme, a revamped Gold Deposit Scheme (GDS) was introduced to enable individuals and religious institutions to deposit their unused gold with banks.

Features of Gold Deposit Scheme

Under the scheme you can deposit a minimum of 30 grams of gold, either in jewellery, or in bullion, with banks. You can make deposits in short term, medium term and long term. While the tenor of short term deposits ranges from one year to three years that for medium term is between five to seven years. The long term deposit is between 12 and 15 years. The interest denomination for the short term deposits is in gold grams, but those for the other two categories are in rupees. While banks decide the rate of interest for the short term and medium term deposits, the rate of interest for long term deposits is at the discretion of the government. Generally, you can receive an interest ranging from two to three per cent. After you deposit your gold jewellery, banks take consent for melting it. The gold purity is then tested at BIS approved hallmark centres. Then you are provided with a certificate about the amount and purity of the gold that has been deposited. The choice for redeeming the deposit, either in gold or in cash has to be provided at the time of making deposits. GDS is exempt from capital gains tax, wealth tax and the interest on the deposits is not taxable.

Thus, this scheme serves two purposes in the economy:

  • To mobilise the idle gold in the country and put it to productive use in the economy.

  • To provide customers with an opportunity to receive income in the form of interest on their idle gold holding.

Sovereign Gold Bond Scheme

SGBS was also introduced in the Union Budget of 2015-2016 to promote digital gold as an alternative to purchasing physical gold. You have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The price of the bonds, issued both in paper and demat forms, is fixed on the basis of prevailing price of gold. The investment is for a period of eight years with an option of premature withdrawal from the fifth year onwards. You also have the option of rolling over the bond for a further period of three years, if the price of gold is low. The SGBS has also been made eligible to be traded on exchanges and can also be used as collateral for loans. Additionally, you are exempted from capital gains tax arising on redemption of SGBS.

Benefits of SGBS

You receive the existing market price at the time of redemption of bonds along with interest. It is better than holding gold in physical form as the risks and costs of storage and security are eliminated. This form of ‘paper gold’ is free from costs like making charges or issues like purity of gold in jewellery form. You can easily invest in this scheme after completing the KYC process. If you hold these bonds in demat format, then these can be traded in stock exchanges. If you want to use it as collateral for loans, then the loan to value ratio is the same as applicable to ordinary gold loan.

Maximum and minimum limit for investment

The bonds are issued in multiples of one gram of gold. While the minimum investment is one gram, you can invest in a maximum of 4 kg under the individual’s category. For trusts, a maximum of 20 kg is permissible.

How will the SGBS affect the Indian economy?

The scheme aims to reduce people’s dependence on physical gold as savings. As the bonds are similar to physical gold in terms of value and investments, the scheme would reduce imports. This again will bridge the CAD.

Purchasing 24 karat gold online

If you are not sure about the quality of gold being purchased from stores or jewellers, then you can easily purchase 24k gold online on Finserv MARKETS, which facilitates buying, selling and delivery of physical gold at the click of a button. You can rest assured about the quality, authenticity and safety of the gold here.

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