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Gold monetization failure

Kashmir Times. Dated: 5/25/2016 11:10:28 PM

Reasonable interest rates, cap on gold deposits and tax holiday will gauge the operationalisation of the scheme in India

The proposed gold monetization scheme has unfortunately failed to take off despite its announcement by the central government more than two years back. But the proposed scheme has the potential to help in unlocking the value of idle gold and gold ornaments that have been accumulating over the years in most of the Indian families as part of family heirlooms passed from one generation to the other over the past many centuries. Keeping in view the accumulated assets of the families particularly gold, which is the highly consumed imported item from around the world to the extent of 3000 tons on annual basis, the central government has come up with a scheme to extend its benefits to the people. Though a scope of minimum limit of 30 grams has been kept for deposit in the banks, in all likelihood, there would be more than an estimated population of 100 million having more than this quantity locked in their homes or banks without earning a single penny out of them. Such a scheme if it comes into operation in the next few months will be one of the biggest water sheds in the financial history of the nation to link up a precious metal with monetization programme. Despite the fact that most nation-states around the world have been toying with the idea of demonetizing gold from the Gross Domestic Product (GDP) in view of their declining reserves of yellow metal in their banks besides calculation of GDP in terms of industrial productions and exports of various item from their nations. The idea did not find many takers around the world when the first voices were raised in US and some of the European nations in mid-eighties of the twentieth century. The weighing of their pros and cons forced these nations to abandon the idea and carry on with the process of linking gold reserves with GDP of these nations as has been the practices over the past almost two millennia. Gold deposits and reserves in the nation's banks became the basis for calculation of income of these states in the international market. It was only in the last century that other industrial goods, technology and agriculture were added to the list of products manufactured and produced by these nations as part of their GDP.
If everything goes well, the benefits to be extended to the families in India through gold monetization have to be weighed with utmost care and interest rates are to be worked out by the banks besides retaining the regulation control by the central bank particularly the Reserve Bank of India (RBI) for making fast paced reforms on this issue. Apart from the interest rates which may be left to the individual banks by the RBI and the central government, there is also a need to maintain uniformity on the issue. This is because of the fact that gold has been the worst performer in the last one year as a stock in the open market earning only about 3 percent on its asset value. At present only the State Bank of India (SBI) is allowing one percent interest on gold deposits that are accepted by it on annual basis. This needs to be sorted out for making the scheme attractive for the people to bring in gold to the banks and that has to be somewhere close to 6 percent per annum. Unless the jewelry is to be changed for design purposes which is high on the agenda of the people, raw gold in the form of bars, bricks and coins are as good as idle gold asset lying in the homes and lockers of the banks. Some distinction is also to be made by the banks for accepting jewelry on fixed time frame basis so that monetization becomes easier for calculations for the financial institutions. At this, when the banks do not advance loans or allow financial transactions to the extent of 60 to 80 percent of the value of houses or other real estate properties, which are a good guarantee for the loans of the banks, there has to be some distinction because of high liquidity value of gold. The interest rates and cap on gold deposits besides allowing tax holiday on such schemes will be the parameters for making this scheme successful.