GMS – it is good but is it good enough?

by Mr. Jayant Manglik, Chair, FICCI Working Group on Commodities and President – Retail Distribution, Religare Securities Ltd.

The Gold Monetisation Scheme (GMS) has been announced, as promised in the last budget. It is one of three parts of the strategy to address the problem of India being the largest importer of gold worldwide, consistently. This love for bullion has hurt India’s Current Account Decit (CAD) year after year. After crude oil, gold is our biggest import and led to 4.8% CAD in 2012-13. Therefore a long-term gold policy which can achieve the conicting objectives of quenching our thirst for gold while preventing foreign exchange outow was a long time coming. Clearly we have to make the huge amount of gold available in India productive and the GMS tries to do exactly that by monetizing the much-quoted, but really a guesstimate number, of 22,000 tons of gold worth about US$ 1 Trillion (about Rs 66 Lac Cr) accumulated by Indian households.

Being a cultural phenomenon, almost every household has gold in the locker. Incredibly, our annual consumption actually rose as the price went up over the last 15 years. Since it was consumption driven by prosperity, the need was two-fold i.e decrease gold imports which was done by imposing import duty of 10% (arguable but perhaps inevitable) and secondly, to monetize the available gold and make it a productive asset.

This aim led to a clear strategy witJayant Manglikh three key parts: the Gold Monetization Scheme (GMS), the Gold Sovereign Bond Scheme and development of a standard India Gold Coin. Working with speed and clarity, a Draft Gold Monetization Scheme was rolled out for public debate, comments and suggestions. In fact, towards the end of May 2015, FICCI had organized a roundtable on the draft Gold Monetization Scheme. The audience consisted of industry players across the gold value chain and their questions were addressed by Mr. Ajay Tyagi, Additional Secretary, Ministry of Finance and Dr. Saurabh Garg, Jt. Secretary, Investments and Currency. The audience came up with some 24-carat suggestions on the topic, borne out of experience and gave interesting insights on how the GMS ought to progress. All of these were duly noted by the government team present and it was clear that many of them would receive due consideration and possible incorporation into the policy if they pass muster. Few objective points which were thrown up included the availability and implementation of standardized norms for gold purity, availability of accredited domestic reneries, addressing the lack of enough assaying centers and a central marketplace to buy and sell gold. All these plus other factors would decide the success of the GMS.

Accounting for feedback and approved by the cabinet, the details of the schemes have now been announced and will come into effect after notication by the nance ministry. The terms for GMS specify a minimum of 30 gms of gold as gold deposit. This compares well with the 1999 scheme which had 500 gm as the minimum and therefore kept most people out of the scheme. Second, the purity of the deposited gold will be veried by one of the 331 BIS certied assaying and hallmarking centres across the country. Of course, this is a very small number and will prevent mass participation. Third, the minimum melting charge for up to 100 gm of gold will be Rs 500 per lot which can go up to Rs 13,400 for 900 – 1000 gms. Since the idea is retail participation, let us assume an average of 50 gm per person which means gold value of about 1,30,000 on which Rs 500 melting charges comes to about 0.4%. Given that the interest paid out on the deposited gold is expected to be around 1% per annum (given that banks can lease gold from abroad that this rate), the melting charge takes away a good part of the rst year’s interest income. Also, since jewelry has to be melted, it will either not be offered for the scheme by many or it will mean writing off about 10 to 15% of the gold value. It is also pertinent that the lady of the house may agree to deposit the gold bars but handing over jewelry as deposit sounds like a challenge. The favourable tax treatment is a positive sign for the scheme. As is the fact that redemption will be at the prevailing value at the end of the tenure.

Overall, it is a good effort in the right direction but not necessarily one which will lead to instant results. While there is no ofcial target for the rst year (or subsequent years), it is necessary to assess the materiality of the effect of the scheme. One gure being bandied about is 20 Tons of gold in the rst year. Let us be optimistic and assume 50 Tons which @ Rs 26,000 per 10 gms will cost about US$ 2 Billion. Only! So if the numbers are not large it may not help much. Perhaps it may be fair to assume that most of the gold will actually come from temple trusts over which the government has some level control. Public participation may not be the highlight of this scheme.

There are learnings too from the Gold Deposit Scheme of 1999 which garnered less than 15 Tons over 16 years. Lack of sufcient assaying facilities was one of them. Two others, i.e. a lower entry grammage and acceptance of jewelry are already addressed in the new scheme. The nding that more than 60% of Indians would be ok with receiving different gold i.e. customer gives in jewelry and receives the gold back in bar form, is one conclusion from a joint WGC – FICCI – BRIEF survey report. This works in favour of GMS. Given the CAD challenge and that this large import item lies unproductive it is a necessary effort. Finally, the requirement of a full KYC from depositors may inhibit participation as most gold has likely been bought in cash or the source is hard to ascertain. Nevertheless, the scheme will also help in making gold part of the larger nancial system, currently it is ineffectual and sits idly in safes and lockers. The interest rate too will, of course, be a key driver of this product. But banks will be inhibited by the international leasing rate of gold, which is about 1% per annum. Else there will be a large arbitrage opportunity which will simply bleed banks.

On ground, the success of GMS will lie in the implementation and smooth operations which make it easy and attractive for all to participate. This plan now deserves great execution. Given the sustained affinity we have for gold, the right gold policy can make it a financial asset with benefits for the individual as well as the state.

In sum, between the three segments of the government’s gold policy, the GMS would be the most challenging due to logistics and implementation issues. The sovereign gold bond scheme will definitely be successful and will also help in hedging the central bank’s gold exposure. The India minted Ashoka-emblem gold coins should be a runaway hit and will essentially made out of gold collected via GMS. The overall effort of the government towards addressing the issue of gold squarely using all meansat its disposal is commendable.

This article also published in FICCI CAPAM 2015 on October 27, 2015

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