Gold may be the big game changer for India

In the hype and enthusiasm surrounding the budget, most budget analyses focused on the postponement of GAAR, cut in corporate taxes and the thrust on renewable energy. But the real game changer could be the announcement of the Gold Monetization scheme. And, if the scheme catches on, its impact at a macro level, on household savings and the current account deficit could be huge. But let us understand why…

Digging out the domestic vaults…

India is currently the largest consumer of gold, closely followed by China. Historically, Indian households have always preferred the safety and physical assurance of gold and real estate. Financial assets like equities, bonds and mutual funds have never found great favour with Indian households. Indian households are estimated to hold gold to the tune of close to $950 billion. That is roughly 50% of the annual GDP of India. You can just imagine the impact if that gold comes into the productive mainstream. But how is the scheme going to do this?

Firstly, the Gold Monetization will mint Sovereign gold coins with the Ashoka Chakra. With the backing of the government of India, this scheme will allow a lot of idle gold to be converted into Sovereign Gold coins. These coins can be deposited with the banks and interest can be earned on this deposit. That is a good way to monetize idle gold. Secondly, the Sovereign Gold Bond Scheme will operate like a gold ETF where people will be virtually able to hold gold in demat form. Today, a person who wants to borrow against gold has to physically pledge the gold with the banker and take the loan. Under the Sovereign Gold Bond Scheme, there is no need to pledge physical gold to get a gold loan. Also sovereign bonds can be redeemed either in cash or in gold, which will attract both the hoarders of gold as well as investors in gold.

Good for the current account deficit…

One of the major import items for India, apart from Oil, is gold. It is sad that despite sitting on a hoard of $950 billion worth of gold, India runs up a huge import bill each month. The Gold Monetization Scheme can change all that. Indian jewellers can rely on domestic gold, rather than on imported gold, to meet their demand. Which brings us to the last question: Will people come forward readily to participate in this scheme?

This point needs to be understood in the context of another innocuous announcement in this budget. The abolition of Wealth Tax means that households can come out more freely with their gold holdings and monetize it without the fear of being hounded. If you put two and two together, it is obvious why this scheme could be a game changer for India’s macro-economy. For the time being, let us wait for the announcement of the finer details of the Gold Monetization Scheme in May 2015!

4 thoughts on “Gold may be the big game changer for India

  1. Seriously, I don’t think there is any other country in this world, other than India, that considers gold as the most important asset of their lives. You have coined the suitable title for your blog; gold is really the game changer for India. Many people opt for gold loans but I think they are always skeptical to choose the right institution to apply for. I can recommend you a reliable recourse where I found a few additional benefits along with the regular one.


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