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Genuine gold depositors should not be harassed

Last Updated 13 November 2015, 10:44 IST

Since assuming office in May 2014, the Modi-led government has come up with a battery of simple policy initiatives that can have powerful and enduring impact on the economy. The list of such common-sense driven programmes include ‘Make in India’, ‘Skill India’ and ‘Digital India’. The gold monetisation scheme (GMS), launched on November 5 by the Prime Minister, is an addition to the list, potentially creating a win-win situation for all the stakeholders and can be immensely beneficial for the economy in various ways.

The relevance of GMS can be highlighted in the backdrop of some inherent facts related to the Indian economy. The Indian households, traditionally, have been investing huge amount of funds in gold and gold jewellery. Historically, this was a means of accumulating wealth with paucity of options for financial savings, as also due to social customs like marriages, where purchasing gold jewellery has been a matter of societal compulsion even for the economically poor households.

 Of course, in recent years, purchase of bullion has become an attractive investment option for many rich households in the process of portfolio diversification. A large part of this mounting demand for gold was met by burgeoning gold imports. This reflected the close association between movements in prices of gold and gold imports.

The above has led to the emergence of two concerns. First, the acquisition of gold and gold jewellery is a way of diversion of resources away from financial savings, like bank deposits, mutual funds, small savings, etc. The financial savings get easily transformed into productive investments, and thus, acquisition of gold and gold jewellery creates a wedge between savings and investments, hurting economic progress. Second, large volume of gold imports drains down valuable Forex reserves, which could have been used for essential items, and creates unnecessary pressure on the foreign exchange rate. The proportion of gold imports in total imports in India substantially increased from 6.7 per cent in 2007-08 to 11.5 per cent in 2011-12. It is in our recent memory that how the government had to initiate a series of restrictive measures to curb increasing gold imports and thwart related building of pressure on the balance of payments.

Depositors earn interest

In this perspective, GMS is a sensible policy move to address the above concerns. It is beneficial to the gold depositors as they can earn interest income on the otherwise idle gold holding. They also retain the opportunity to gain from price appreciation of gold (for shorter term scheme of one to three years). The banks can use the gold deposits for coining or lending to the jewellers or open gold metal loan accounts generating some business and earning. The economy as a whole is set to gain from the reduced imports of gold, as a part of the demand from the gems and jewellery industry can be met from the gold deposits accumulated under the scheme. 

More importantly, savings accumulated in the form of gold by households can be channelised to productive use, improving savings-investment linkages, thus sprouting potential for the faster economic growth.

 However, the success of this scheme critically hinges on several issues such as operational aspects at the purity testing centres; transaction costs/penalty involved in premature withdrawal of gold deposits; and most importantly, addressing apprehensions of potential depositors on probable harassment by tax authorities, etc. We suggest adequate care to ensure a streamlined and time-bound procedure for undertaking hallmarking of gold and issuing related certificate, without causing painful waiting and multiple visits for the depositors. Maybe pre-allotted schedule for a specific number of depositors per day need to be chalked out in consultation with the depositors. On premature withdrawal, the terms and conditions should be liberal and at least on par with those existing for FD schemes in banks. Also, those who have acquired gold from genuine income need adequate protection from harassment by the tax authorities.

(Amaresh Samantaraya is Associate Professor, Department of Economics, Pondicherry University. You can reach him at amaresheco@gmail.com)

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(Published 13 November 2015, 10:44 IST)

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