For India, there are few metrics that capture the resilience of gold as a venerated investment option than the bullion’s stock in households and temples. The government’s gold monetisation scheme which will allow households to park family jewellery with banks and earn tax-free interest, should be seen through this prism. The yellow metal has long been a hedge against inflation. India imported 900 tonnes of gold in 2014-15. Three-fourths of this or a staggering 675 tonnes went into the making of jewellery, making the country the world’s largest market for ornaments. More than 50% of gold jewellery is bought for weddings. With 50% of India’s population under 25 and approximately 150 million weddings anticipated over the next decade, wedding-related gold purchases will likely top more than 500 tonnes a year.
The monetisation scheme, which was first announced by finance minister Arun Jaitley in his budget speech in February and its draft announced on Tuesday, has some important intended objectives. At the very least, this will help greater recycling of domestically held gold. The current gold stock holding by households and temples is estimated at 22,000 tonnes. About 3,000 tonnes are believed to be locked up in temples alone. As brokerage and research firm Nomura has pointed out, even if the scheme is able to create 100-200 tonnes in gold deposits every year over the next few years, it could help reduce the gold import bill by 10-20% (by $3-6 billion) annually.
Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income. While interest in newer financial savings products and investment funds continues to grow in India, more than 50% of household savings still centre on tangible assets such as real estate and precious metals. Therefore, the scheme can well evolve into a preferred instrument to earn attractive returns from the gold that is otherwise lying unused. Importantly, the scheme can aid the government’s plan for spreading financial inclusion. More than two-thirds of gold jewellery demand comes from rural areas.
There are instances of hapless villages falling into a debt trap of private money lenders by mortgaging gold with them. If structured robustly, the scheme can wean people away from placing their gold as collateral with unregulated money lenders to parking with banks. The scheme’s real success, though, will depend on the interest rates banks offer and how attractive these are vis-à-vis fixed deposits and other instruments.
