Everything You Need to Know about India’s Gold Strategy

According to the World Gold Council (WGC), Indian households today hold the world's largest private stock of gold, a whooping reserve of almost 25,000 tonnes. With a total worth of approximately Rs 110 lakh crore, it is almost 40% of the country’s GDP. All of this value lies unused, locked away in private safes & lockers. Launched by the government in 2015, The Gold Monetisation Scheme (GMS) was aimed at converting this idle value into a productive asset for the country, as well as reducing the country’s dependence on import of gold.

Amidst the Covid-19 pandemic induced economic strain and the crash in gold imports, the government is now looking at further ways to tap into this reserve to aid the economic revival. Let us take a look at what the plans are:

The Issue :

According to the latest data from the Ministry of Commerce, the huge shortage of demand due to the Covid pandemic have caused gold imports into the country to plunge down to $79.14 million during just the first two months of 2020-21. Combined with domestic bullion prices reaching a record high, the gold demand for India in 2020 is expected to hit the lowest level it has been in 26 years, as predicted by the WGC.

The News :

In the light of the above, jewellers & bullion dealers have been approached by the government for strategies on how to tap India’s idle gold. Solutions proposed by the industry have been to align the present income tax law with the gold deposit schemes, raise the limits of gold holding labelled as 'Streedhan', slight modifications to the GMS in order to make it more lucrative, and to afford local refineries greater flexibility to help them scale up as part of a broader gold policy.

The GMS Situation :

The primary objective of the GMS was not only making the existing gold schemes more effective, but also broadening the scope for mobilising household held gold and putting them into productive use. However, being only able to garner deposits of a paltry 20 tonnes of gold till now, the existing GMS seems to have fallen short of its objective so far.

Jewelers and market analysts attribute this effect to reluctance & fears. Since households accumulate gold over the years, the older documents for the purchase may no longer be available even if these purchases are legitimate. This has given rise to fears of being questioned by the tax department, and a reluctance to participate in the deposit schemes. 

GMS 2.0 Advantage :

The revamped GMS provides a number of benefits to gold investors. Under the scheme, they can make term deposits of their idle gold, which safeguards their gold, as well as provides interest returns. Since the gold is deposited in GMS, investors save storage costs on physical safekeeping of their precious metal, while also benefiting from the capital appreciation and interest accumulated over time. Additionally, this gold deposit can be in any form they choose — whether it be jewelry, coins, or gold bars, and during redemption, the depositor can opt to take either cash or gold against their investment.

Possibly the most lucrative benefit is that the interest earned by investors on the gold deposited shall be exempted from tax. Thus, investors can earn up to 2.25% pa in case of medium and long-term deposits.

Industry Proposals :

In various discussions with the government, key industry players have proposed the following modifications to revamp the GMS:

• Income Tax Benefits :

The Gem & Jewellery Export Promotion Council (GJEPC) proposes linking the GMS with the Income Tax Act which according to a 2016 directive states that even if they do not appear to tally prima facie with the income record of an assessee, the following amounts of gold jewelry in a household shall not be seized :

• Up to 500 grams per married woman

• Up to 250 grams per unmarried woman

• Up to 100 grams per male member

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The industry also believes that these limits, fixed in 1994, need to be revised to 1 kg, 500 grams, and 200 grams, respectively.

• Added Flexibility

Another issue flagged was that although the existing gold deposit scheme allows customers to deposit their idle gold for earning interest, there is a lack of flexibility. Industry sources indicate that they want the deposit certificates under GMS to be made tradable in demat form with tracking mechanisms aimed to give these deposit certificates the added feature of liquid assets. The minimum deposit has also been requested to be revised to 10 grams instead of the present minimum 30 grams.

Additionally, the industry has requested a more effective scheme to fit in with the existing regulations on gold import, declaration and taxability of income and wealth, and prevention of money laundering, instead of a plain amnesty window as is the case now.

• Gold Account Incentive

Record low imports of bullion and dore bars (a semi-pure gold alloy) have led gold refiners to recycle scrap jewelry to meet the current physical gold demand. In this scenario, incentivising the GMS by the government for banks and allowing the opening of gold metal accounts can go a long way in meeting the country’s need for new gold by procuring & recycling old gold from domestic holdings, according to James Jose, MD, CGR Metalloys.

The Ministry of Commerce and Exports is also working on a strategy to enable delivery of locally refined gold via its Futures and Options contracts.

• Refinery Project Encouragement :

Nearly 40% of the total gold imports of the country is in dore form by refiners, while finished gold imports by banks make up the rest. Dore import licenses are held by 15 out of the 29 refineries. The industry had, in the past, proposed the government to encourage large greenfield refinery projects like UAE and China to allow the export of refined gold from India. If banks are allowed to purchase ‘Indian good delivery’ bullion from BIS certified gold refineries in India instead of from those abroad, it will encourage households & jewellers to sell more gold to the local refineries, and together, this can reduce the need for import of gold. 

• Higher Rates of Interest :

Depositors now face a loss of nearly 7-14% of the principal amount as well as the interest Counting the making charges & process loss. Apart from the visible reluctance of Indian households to part with their family jewellery, this has been another clear reason for the gold deposit scheme to languish. A higher interest rate on the gold deposited has been proposed  as a way to compensate for this loss.

The new and improved GMS is set to be developed by the Government of India after taking all these suggestions into consideration. With gold prices set to hit a record high in the current fiscal year, this is the right time to consider taking out your idle gold from bank lockers & putting them into the new gold deposit scheme, so that your precious metal can give you greater returns than ever.