Introduction of New Gold Schemes in India

Background
The gold policy in India has been traditionally governed by the Gold Control Act, 1968,
an act of the Parliament of India, which was enacted to control the sales and holding of
gold in personal possession. The act stemmed from the accentuation of foreign exchange
in 1962, when the Finance Ministry recalled all gold loans given by banks and banned
forward trading in gold. In 1965, a gold bond scheme was launched with tax immunity
for unaccounted wealth. This was the lead-up to the Gold Act of 1968, which stated that
citizens are prohibited from owning gold in form of bars or coins. The act got repealed in
1990 as government embarked on the path of liberalization.
In September 1999, the Indian government launched a Gold Deposit Scheme to utilize
the idle gold reserves and simultaneously give a return to gold owners. Another aim was
at reducing the countrys reliance on gold imports, however this plan wasnt accepted
widely by the people. Gold kept idle is considered a key factor behind the current
account deficit. Acting on this belief, the government has announced policy measures
aimed at stemming the flow of official imports of gold. The three major schemes that the
finance ministry has announced are: Gold Monetisation Scheme, Sovereign Gold Bond
Scheme and Indian Gold Coin.

Gold Monetisation Scheme

Indian families cherish gold. Over the past five years alone, consumers in India have
bought almost 4,500 tonnes of gold and the demand is forecasted to remain buoyant for
many years to come. Much of this gold remains at home. An estimated 22,000 tonnes of
gold, worth more than $1 trillion is currently held in Indian households. Even if a small
portion of this gold were monetized, its economic impact would be significant.
With this in mind, the government has come up with a Gold Monetisation Scheme,
which states that people can deposit their gold with banks and the bank would pay
interest on the deposited gold. As per traditional practices, people keep gold in the
lockers, for which they have to pay the banks. With this scheme banks would be paying
people to keep gold with them, this would transform gold from dead money to live
power. A major upside would be that people would be incentivized to keep gold with
banks rather than keeping it at home.

Sovereign Gold Bond Scheme

Investors now have a new route to invest in the yellow metal. The government in
conjunction with Reserve Bank of India has come up with sovereign gold bonds, which
would enable people to hold gold in paper form with these bonds. This rids people of
their worry to find a suitable place to keep their idle gold.
The gold bonds would be denominated in multiples of grams of gold with a basic unit of
1 gram. The tenure of the bond would be 8 years with exit option from 5th year to be
exercised on the interest payment rates. Minimum investment would be 2 units (i.e., 2
grams of gold) and maximum permissible limit would be 500 units per individual per
fiscal year.
The price of gold bond will be fixed in Indian Rupees as per previous weeks simple
average of closing price of 99 purity gold published by the Indian Bullion and Jewellers
Association. Payment of the bonds would be under electronic funds transfer, cash
payment, cheque or demand draft. The investors will be issued a stock or holding
certificate. The bonds are eligible to be converted into demat form. The redemption price
of the bond will be in Indian Rupees based on previous week's simple average of closing
price of 999 purity gold published by IBJA. The investors will be compensated at a fixed
rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.
The interest on gold bonds shall be taxable as per the provision of Income Tax Act and
the capital gains tax shall also remain same as in the case of physical gold. (Refer
Appendix for more info)

Indian Gold Coin

PM Modi has announced the launch of Ashok Chakra bearing gold coins in
denomination of 5 grams and 10 grams. The security printing and minting corporation of
India would be minting these coins. Initially 20,000 coins of 5gram and 30,000 coins of
10gram would be made available. The coins would be made available at prices lower than
the market rate and will be distributed through branches of banks and post offices.
The country has been using foreign gold coins, while the bullion bars currently circulated
in the country are used abroad. Government hopes to generate some investment in the
lackluster market and reduce countrys dependence on imported gold coins. Moreover
theres a perceived demand among buyers regarding Indian gold coins. The Indian Gold
coin would also have lower prices pertaining to a 5-6% premium price as compared to 810% premium price on foreign gold coins. The government is also increasing the demand
for gold which has been declining since past few quarters.

Looking to the Future

The above schemes have been announced by the government and would be launched in
due course. You are required to address the following questions in your submission:
1. Conduct a detailed analysis of the three schemes and find the connect between
them.
2. What would be the impact of these schemes on the economy?
3. How to should the government market these schemes and what should be the
marketing strategy?
The key deliverables as expected, would include solutions to all the three aspects of the
case.

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