News analysis

Gold rush unlikely for Modi's new scheme

At face value, the move could release about 20,000 tonnes of gold currently in storage. However, some experts and jewellers said it would be "emotionally difficult" for Indians to melt down jewellery handed down over the generations.
At face value, the move could release about 20,000 tonnes of gold currently in storage. However, some experts and jewellers said it would be "emotionally difficult" for Indians to melt down jewellery handed down over the generations.PHOTO: AGENCE FRANCE-PRESSE

Experts doubt many will be willing to monetise their gold to lift country's economy

Prime Minister Narendra Modi has kicked off a scheme to convince temples and households to give up tonnes of gold they have in storage, but experts and jewellers said the scheme may not get off to a flying start in a country where the yellow metal arouses strong emotions.

Mr Modi on Thursday launched the gold monetisation scheme, hoping to boost India's economy with an estimated 20,000 tonnes of gold traditionally kept in temples, homes and bank lockers.

In addition, he introduced a sovereign gold bond scheme that enables investors to buy the metal on paper instead of in its physical forms such as bars, coins and jewellery. The price of the bond will be linked to gold prices, the Finance Ministry said.

  • Gold scheme

  • The gold monetisation scheme aims to lure depositors into giving up their gold to banks for an interest rate of 2.25 per cent on the value of the gold in medium-term deposits of five to seven years, and 2.5 per cent on long-term deposits of 12 to 15 years.

    Under the scheme, a depositor can go to a testing centre, get the gold melted and converted into bars and receive a certificate. Banks will then start paying interest on the deposited gold. At the end of the scheme, the depositor will get back the entire amount either in gold or cash.

    The gold will be sold or lent by banks to jewellers or auctioned off, bringing gold that was idle into the system.

    Under the scheme, depositors can invest a minimum of 30g, with no limit on the maximum.

Experts and jewellers hailed the government's efforts to cut down the gold import bill, which was US$31.2 billion (S$43.9 billion) last year, and said there was a chance the gold bond scheme would help reduce that staggering amount.

But they listed drawbacks including investors' concern that the tax authorities would question them about the source of their gold and improving infrastructure at the Collection and Purity Testing Centres.

Some said it would be "emotionally difficult" for Indians to melt down jewellery handed down over the generations. Others said the interest rate is just not attractive enough and that this was a way for the government to keep track of unaccounted wealth, often used to buy gold.

"It (the scheme) is a welcome effort to address India's fascination for gold but issues remain," said Mr Sunil Kumar Sinha, director of public finance and principal economist at India Ratings and Research.

"Even though you will be paid (the) interest rate ... but will that be sufficient to part with jewellery considered part of inheritance?"

Mr Anantha Padmanabhan, southern region head of the All India Gems and Jewellery Trade Federation, predicted only 20 tonnes of gold would be deposited under the present scheme and argued that jewellers needed to be more involved.

"This is a welcome scheme," he said. "But if jewellers are appointed as agents, we can convince customers about the returns and deposits would increase. People trust their jewellers. They may not trust the centres."

In India, gold ornaments, with designs unique from region to region, are passed down through the generations or bought during weddings and festivals. But they are also considered an investment to tide families over possible tough financial patches.

The demand for gold is so high that up to 1,000 tonnes is imported annually. This year, a survey showed India overtaking China as the world's biggest consumer of gold at 642 tonnes in the first nine months compared to China's 579 tonnes.

Mr Modi on Thursday underlined the safety in storing gold with the government instead of at home.

"20,000 tonnes of gold is just lying unused. Maybe that is the reason we are poor. There is no reason why India should be poor. If we make some effort in the right direction, we can be free of the tag," said Mr Modi.

The government is also hoping that temples, which have an estimated 2,000 tonnes of gold donated by devotees as thanksgiving or to propitiate the gods, would also deposit their idle gold in the scheme.

Some of India's richest temples including Sri Venkateswara Swamy Temple in the south and Shree Siddhivinayak Temple in the west, said they were waiting to see the fine print of the policy before committing temple gold to the scheme.

"Till we see the policy, we cannot take a decision. If we get more funds to put into the education and medical trust (we run), we may think about it," said Mr Narendra Murari Rane, chairman of the trust for the Siddhivinayak Temple.

"We auction gold jewellery, which is our first preference. "

Experts believe that a majority of the gold in the initial burst will come from the temples and not households.

"It would be easiest for them (temples). But it will spread among households through word of mouth. One should look at it as a longer-term story. It is a good scheme but will take time to run smoothly," said Professor Jayanth Varma, head of the India Gold Policy Centre at the Indian Institute of Management Ahmedabad.

"If it succeeds, it will introduce a new source of gold supply."

A version of this article appeared in the print edition of The Straits Times on November 07, 2015, with the headline 'Gold rush unlikely for Modi's new scheme'. Print Edition | Subscribe