GOLD MONETIZATION SCHEME

Finance Minister, Arun Jaitley during his budget speech stated, “India is one of the largest consumers of gold in the world and imports as much as tonnes of gold each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, mostly this gold is neither traded, nor monetized”. In order to bring into circulation a part of the 20,000 tonnes of gold held by households and institutions, the Finance Minister introduced the Gold Monetization Scheme that will enable investors to deploy their gold and earn interest.

Also, this will increase recycling of domestically held gold and reduce jewellers’ reliance on imported gold. GOLD MONETIZATION SCHEME

High gold import was one of the reasons for high current account deficit in recent years, which resulted in a crisis-like situation in the second half of Imports came down due to restrictions in the form of high import duties and fall in international gold prices. Since India imports large amounts of gold, which are to be paid in foreign exchange, the government devised to recycle the gold stock available in the country in order to save foreign currency, which will also reduce vulnerability in the external account.

What is Gold Monetisation Scheme (GMS)?

Gold Monetisation Scheme allows depositors of gold to earn interest on their metal accounts with banks. Once the gold is deposited in metal account, it will start earning interest. GOLD MONETIZATION SCHEME

The interest earned on it will be exempt from income tax as well as capital gains tax.

Let us see the formula of the Current Account Balance (CAB) CAB = X - M + NI + NCT X = Exports of goods and services M = Imports of goods and services NI = Net income abroad [Salaries paid or received, credit / debit of income from FII & FDI etc. ] NCT = Net current transfers [Workers' Remittances (unilateral), Donations, Aids & Grants, Official, Assistance and Pensions etc] CURRENT ACCOUNT DEFICIT What are its objectives? GOLD MONETIZATION SCHEME

The scheme has three basic objectives:  To mobilize gold held by households and institutions in the country.  Make gold available on loan from banks to jewellery businesses.  To reduce dependence on imports.

How it generally works? GOLD MONETIZATION SCHEME

 When a customer brings in gold (jewellery) to the bank, it will first be tested for purity and after the consent of the customer, it will be melted.  A certificate by the collection centre will be given stating the amount and purity of gold which will have to be produced in the bank for opening the gold savings account. The quantity of gold will be credited into the customer's account.

GOLD MONETIZATION SCHEME  Also, customers may be asked to complete KYC (know-your-customer) process.  The deposited gold will be lent by banks to jewellers at an interest rate little higher than the interest paid to customer.

What is the tenure?

GOLD MONETIZATION SCHEME  The tenure of gold deposits is likely to be for a minimum of one year, with breaking of lock-in period facility similar to your fixed deposit accounts.  The minimum quantity of deposits is pegged at 30 grams to encourage even small deposits.  The gold can be in any form, bullion or jewellery.

How the redemption takes place?

GOLD MONETIZATION SCHEME Customer will have the choice to take cash or gold on redemption, but the preference has to be stated at the time of deposit.

How is the interest rate calculated?

GOLD MONETIZATION SCHEME Both principal and interest to be paid to the depositors of gold, will be ‘valued’ in gold. For example if a customer deposits 100 gm of gold and gets one per cent interest, then, on maturity he has a credit of 101 gram. The interest rate is decided by the banks concerned.

How will the banks get incentivized?

GOLD MONETIZATION SCHEME Banks will be allowed to deposit the mobilised gold as part of their Cash Reserve Ratio (CRR) with the Reserve Bank of India (RBI). CRR is the amount of funds that commercial banks need to keep with the RBI. Banks can also sell the gold to generate foreign currency. The currency further can be used for lending to exporters and importers. Banks can also convert the gold into coins which can be further sold to their customers.

What Jewellers need to know?

GOLD MONETIZATION SCHEME  Jewellers can open a Gold Loan Account with the bank.  The jewellers will receive physical delivery of gold from the refiners once their gold loan is sanctioned.  The interest rate charged to the jewelers will be based on factors like interest rate paid to the gold depositors, fee paid to the refiners & Purity Verification Centres and profit margin of the banks.

Let us see the formula of the Current Account Balance (CAB) CAB = X - M + NI + NCT X = Exports of goods and services M = Imports of goods and services NI = Net income abroad [Salaries paid or received, credit / debit of income from FII & FDI etc. ] NCT = Net current transfers [Workers' Remittances (unilateral), Donations, Aids & Grants, Official, Assistance and Pensions etc] CURRENT ACCOUNT DEFICIT Hope you have understood the concept of ‘Gold Monetization Scheme’. GOLD MONETIZATION SCHEME

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