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ISSN (Online) - 2349-8846

Gold Monetization Scheme

Will it Meet with Success?

The Sovereign Gold Bond Scheme is more likely to attract the investors attention in a big way as it
oers higher returns than those of the investments in physical gold and exchange traded funds.
Unless the Gold Monetization Scheme addresses the emotional attachment of investors with physical
gold and shows any signicant improvement over the previous gold deposit scheme it is likely to

P Saravanan (psn@iimshillong.in) and M Srikanth (msk@iimshillong.in) teach at Indian Institute of

Management, Shillong. Suhas M Avabruth (suhas.fpm13@iimshillong.in) is a doctoral candidate at IIM


Indians love gold. The decision to purchase gold is more often than not an emotional decision. It is a
quintessential item in most of our social customs and celebrations, festivals, marriages,
anniversaries, religious rituals, etc. Even governments hold gold as an asset in their reserves (See
Table 1). That is why the demand for gold is inelastic in the nancial markets in spite of rise in its
prices (See Figure 1). According to the World Gold Council, prices of gold in the past decade rose by
400% in the Indian Rupee terms but this did not have any eect on its consumption. In fact, its

consumption, in quantity terms, registered an uptick by more than 70% in the last decade. Demand
for gold in India has been ever increasing mainly due to its high resale value, demonstration eect,
rising auent middle class, a hedge against ination and a safe haven for black money.

Table 1: Ocial Gold Reserves of Various Countries as of 31 March, 2015

Ocial Gold Holdings as % of

Name of the Country Gold Reserves (in Tonnes)
Total Reserves
The US 8133.50 74
Germany 3383.40 68
Italy 2451.80 67
France 2435.40 65
Russia 1238.30 13
China 1054.10 1
Switzerland 1040.00 7
Japan 765.20 2
Netherlands 612.50 57
India 557.70 6

Source: World Gold Council Report, 2015

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Figure-1: Movement of Gold Price in the Past Decade

Source: http://goldprice.org/

Demand for gold constitutes of jewellery (56%), followed by investment purpose (27%) and industrial

use (17 %). India imported 661.4 tonnes of gold worth $33 billion in 201314 and it is the second
largest imported item after crude oil in our import bill. Import of gold (on net basis, after reckoning
export of gems and jewellery), constitutes nearly 25% of Indias trade decit in 201314. Hence,
Government of India (GoI) restricted the import of gold through various measures, such as increasing

import duty on the gold, stipulating additional conditions, such as 80:20 rule for imports, etc.

Though these preventive measures helped in bringing down our current account decit to some
extent, it ultimately resulted in unbridled smuggling of gold into the country through various
channels. Illegal import of gold seized by the Indian customs authorities touched the highest point of
Rs 690 crore during 201314. The Bharatiya Janata Party (BJP)-led government, which was elected in
May 2014, relaxed some of the restrictions on import of gold that spiraled the import bill once again.
Demand for gold in India through 201014 is shown in Figure 2. World Gold Council forecast demand
for gold in India at 950 tonnes in 2015 (Jha 2015).
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Figure 2: Demand for Gold in India (in Tonnes)

Source: World Gold Council Report, 2014

With a view to reducing the reliance on imports to meet the domestic demand for gold in physical
form and bringing out the idle gold for productive use, GoI introduced the Gold Monetization Scheme
(GMS) and issue of sovereign gold bonds vide its notication dated 15 September, 2015. Its main
objective was to mobilise a portion of gold from the estimated gold deposits of 20,000 tonnes from
the Indian households, temples, religious trusts, etc. The scheme that was launched in November
2015 was meant for alternative uses of gold for optimum utilisation of the yellow metal by the

GMS and its Mechanics

The proposed GMS is a revamped version of the erstwhile Gold Deposit Scheme (GDS) and Gold
Metal Loan (GML) which were launched in 1999 and 1998 respectively. As per the current scheme,
the depositor of gold would be given a certicate specifying the amount and purity of the deposited
gold, once the investor agrees to do so after re-assay test (Government of India 2015) done by
Collection and Purity Test Centres (CPTCs, certied by Bureau of Indian Standards).

Subsequently, the customer could submit this certicate to any designated branch of a bank to open
a gold savings account in his/her name subject to fullling Know Your Customer (KYC) norms.
Accordingly, the customers account would be credited by the bank by an amount equivalent to the
quantity of standard gold of 995 neness, based on the prevailing market prices. The bank would
bear the cost of re-assay test in case of deposited gold, otherwise it would be borne by the
customer. Minimum amount of gold that could be deposited under the scheme is placed at 30 gm in
order to encourage collection of gold from small depositors.
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GMS can be operated under three categories, namely (a) short-term deposit (for one to three years
with a rollout in multiples of one year); (b) medium term deposit (for ve to seven years) and (c) long
term deposit (for 12 to 15 years).

While the short-term gold deposits are accepted by banks on their own account, medium and long
term gold deposits are accepted by banks on behalf of the GoI. Interest and principal on the short-
term deposits would be denominated in volume terms, that is, gold in grams. Rate of interest on
these deposits would be decided by the banks based on the prevailing market conditions,
international lease rates, etc. In case of the medium and long term deposits, interest would be
denominated in the Indian rupees and would be decided by the GoI in consultation with the Reserve
Bank of India (RBI). Though interest rates on these deposits have not been made public, industry
sources indicated that it may range from 2%3% per annum (PTI 2015b).

Use of Deposited Gold

The gold mobilised under short term deposits can be sold or lent by the banks to Metals & Minerals
Trading Corporation (MMTC) for minting gold coins or to other banks or to jewelers. However, the
gold mobilised under the medium and long term deposits would be auctioned by MMTC and the sale
proceeds would be credited to the GoIs account. The gold deposits mobilised by the banks under the
scheme would be reckoned for maintenance of statutory liquidity ratio (SLR) (Reserve Bank of India

Merits and Limitations

The scheme has certain advantages viz, GoI proposes to make a provision for Gold Reserve Fund
to address price and currency risks in case of medium and long term deposits. In other words, if the
price of the gold increases at the time of redemption of the deposits, the government would bear the
risk and the investor would get the benet to that extent. Commercial banks, however, would
provide safety on the short term deposits. As such, investors would not have any safety concerns in
this regard. The deposits can be withdrawn prematurely subject to minimum lock-in period and
payment of penalty. Therefore, the scheme oers liquidity on the gold deposits, of all tenures.

The scheme oers two kinds of returnxed interest income on the gold deposit and capital gains, if
any, through appreciation in gold price. Hence, the scheme is more attractive, in terms of returns,
when compared with the investment in physical gold. As the government has stipulated minimum
investment of gold at 30 gm (as against 200 gm in the earlier GDS of 1999) to lure domestic
households, it would encourage investors to maintain gold in the form of nancial asset rather than a
physical asset.

Besides, the gold depositor is done away with payment of rent for storing physical gold as in the
case of keeping physical gold in the banks lockers. However, at the time of redemption of gold
deposit, the depositor may not get the same jewellery or ornaments, which she was holding earlier.
The previous GDS of 1999 provided tax incentives, such as exemption from Income Tax and Wealth
Tax. As per the notication issued by the GoI, the current scheme would also oer the same kind of
tax benets to the investors.

However, on the ip side, the scheme has features which may work against it. The jewellery held by
the households in India is occasionally used; even if it is so, it is treated as a matter of status symbol
and to showcase the wealth of a particular individual. One can never be sure how people will
behave when it comes to physical gold. Introduction of gold futures on the Indian Commodity
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Exchanges has not deterred appetite for physical gold holdings.

Therefore, melting the jewellery, as proposed under the current scheme, will defeat the very purpose
of the scheme. As gold is used as a store of wealth, many people, especially from the rural/semi-
urban areas, who buy gold on various occasions or who wish to park their liquid cash in the scheme
might not have proper record of their income and Permanent Account Number (PAN), etc. In fact,
most of the transactions in gold take place on cash basis and without any documentation.

However, Arun Jaitley, in his recent speech on 9 September 2015, categorically mentioned that the
GMS is not black money immunity scheme (PTI 2015a).

Despite the proposed tax exemptions, very few investors are interested to disclose their income to
tax authorities by depositing gold under the scheme. Hence, the scheme may mobilise gold only to a
limited extent. While the previous scheme (1999) oered relatively low interest rate of 0.75% per
annum on the gold deposits, which was one of the reasons for its failure, the present scheme
appears to be a better version than the earlier one. As the banks are free to decide on interest rates
with respect to short term gold deposits, they may not be willing to oer higher interest rates on the
deposits, in the absence of any incentives/regulations. Lower interest rates will not attract the
investors, in any case. Hence, to attract more number of investors under the scheme, the return
(expected capital gain plus rate of interest) oered should be at least equal to or higher than that of
the prevailing ination rate (Reserve Bank of India 2013). One important point to note is that
appreciation in value of gold may not happen in all market conditions.

In view of the above, only the gold that is held as investment might ow into the scheme.
However, the quantity of gold held as investment is much lower than that of the gold held in the
form of jewellery and other ornaments. At present, the number of CPTCs (Government of India 2015)
located in India are only 331. Further, distribution of these centres is heavily skewed in favour of
southern part of India (142, comprising 43 %), out of which Tamil Nadu has the highest number (57)
followed by Kerala (38). Limited number of CPTCs are existing in the northern and western parts of
India. Except for one centre in Assam, there is no other centre located in the North East. The skewed
distribution of CPTCs will distort the nationwide implementation of the scheme and make the scheme
conned only to certain pockets of the country.

PostscriptAfter the Launch

Narendra Modi formally launched Swarna Bharatthe formal name for the GMS on 5 November

Under this scheme, depositors have the option to take cash or gold on maturity, but the preference
should be declared at the time of deposit itself. Once the option is declared by the depositors, it is
irrevocable. In case of premature redemption, cash or gold will be given to the depositor, at the
discretion of the bank.

In case of short-term deposits under the scheme, a leading Indian public sector bank indicated that
interest rate at rate of 0.50% for one year, 0.55% for two years and 0.60% for three years. While the
government is oering 2.25% on medium term deposits, it is oering 2.50% on long term deposits.

One reason for lower interest rates oered by banks under the GMS is that the international gold
lease rates (the rates at which banks lend gold to jewellers) are hovered around 3%. Besides, the
banks have to bear costs, such as storage, assaying and transportation costs.
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The short-term deposits under the scheme have minimum lock-in period, say 12 months as per the
notication of some banks in India. RBI allows Loan-To-Value (LTV) ratio of 70% in respect of gold

The scheme is attractive especially for the taxpayers as interest income from this deposit will be
exempt from tax. Further, the scheme is exempted from the purview of wealth tax and capital gain
tax (on appreciation in the price of gold).


Gold monetisation and gold bond schemes are progressive measures introduced by the government
for optimum utilisation of gold by the investors and also towards reducing Indias current account
decit. While the GMS is targeted at harnessing the gold lying idle with the individual households,
temples, religious trusts, etc, the GBS is designed to address the investment demand in non-physical
gold. GMS might not be very successful since it does not address emotional attachment of investors
with physical gold and does not have any signicant improvement over the previous gold deposit
scheme. Besides, appreciation in value of gold (capital gains) may not happen always. However, GBS
is more likely to attract the investors attention in a big way as it oers higher returns than those of
the investments in physical gold and the exchange-traded funds. Only time will tell whether the tax
and interest rate incentives oered by the government will determine success of these schemes.



World Gold Council, 2015, available at http://www.gold.org/


World Gold Council, 2015, available at http://www.gold.org/


80:20 rule on gold imports was introduced in August 2013. The rule mandates the traders to export
minimum 20% of all their gold imports.


Government of India (2015): Introduction of Gold Monetization Schemes,, Ministry of Finance:

Department of Economic Aairs (Investment Division), 15 September, accessed on 16 November

Jha, Dilip Kumar (2015): Gold Heads for rst Samvat Gain in 3 yrs, Business Standard, 17 October,
accessed on 16 November 2015,

PTI (2015a): Cabinet Approves Gold Monetisation Scheme and Gold Bonds, Economic Times, 9
September, accessed on 16 November 2015,
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PTI (2015b): Gold Monetisation Scheme: 2% Interest Likely on Gold Deposits, Economic Times, 10
September, accessed on 16 November 2015,

Reserve Bank of India (2013): Report of the Working Group to Study the Issues Related to Gold
Imports and Gold Loans NBFCs in India, February, accessed on 16 November 2015,

Reserve Bank of India (2015): RBI Issues Direction on Implementation of Gold Monetisation Scheme
(GMS), 2015, Department of Communication, 22 October, accessed on 16 November 2015,