GMS 2020: Answer to India's Gold Import Woes

Monetising the privately held vast gold reserves in India was the primary aim of the Gold Monetisation Scheme first launched by the then finance minister Arun Jaitley in 2015.

India imports on average about 900 tons of gold valued around Rs.4.0 trillion each year, resulting in a trade deficit of 2.1% of nominal GDP. Out of the imported 900 tons of gold, about 300 tons cater to investment needs, which are viewed as non-productive. The balance 600 tons is consumed in jewellery form for domestic needs and exports.

While gold is an asset that promotes household savings, generates employment for artisans and above all, competes against consumption imports, it remains a static asset in the portfolio of households, thus limiting its potential economic contribution. It is necessary to explore ways to increase domestic supply and drive export contribution of this segment.

Private gold stock in India is estimated to be 25,000 tons which is increasing every year due to continuous import. Its current value is about Rs.110 trillion ($1.47 trillion), equivalent to 57.5% of nominal GDP. Out of this, usable jewellery might be much lower than 40% leaving surplus gold as 60% or more. It must be gainfully used for boosting the economy vis-à-vis public income (GDP) through a financially viable scheme.

Unsuccessful Previous Attempt

The Government of India introduced the Gold Monetisation Scheme (GMS) in 2015 in an endeavour to unlock this idle gold. The scheme had limited objectives for cutting imports and mobilising funds for the Government by selling gold.

It is financially unviable, since the effective interest cost to the Government amounts to 11.5% per annum, considering the price inflation of gold @9% per annum while redeeming the deposit at market price.

Plus, the scheme has low incentives for the banks due to high interest and inflation cost on idle gold.

Depositors, too, are afraid of the 'tax hazards', as most of the gold is acquired through inheritance and gifts, making it difficult to produce supporting purchase invoices. To add to this, testing and melting charges are borne by depositors. In addition, the depositor can't liquidate the investment, if needed.

GMS 2020 Proposal

The GJEPC has proposed certain modifications to the Gold Monetisation Scheme for the Government to consider while drafting the modified GMS to bring more idle gold into circulation.

Colin Shah, Chairman, GJEPC, said, "Cutting down on imports of gold substantially can be a game changer for the economy. Currently, gold imports cause a trade deficit of 2.1% of nominal GDP. The new modified GMS will be a win-win for all the stakeholders involved – gold depositors (customers), banks, RBI and the Government. I am hopeful that the modified GMS will be helpful in unearthing some of the estimated 25,000 tonnes of gold stored in households across India. This would be another step towards making India self-reliant when it comes to gold."

Vipul Shah, vice chairman, GJEPC, said, "The modified GMS will bring further transparency into the gold trade. Its success will fundamentally alter the manner in which gold is bought, held, used, pledged and sold in the future."

Here are the modifications to the Gold Monetisation Scheme suggested by the GJEPC:

  • Retailers can acquire gold jewellery from customers and after deducting the soldering, stones, etc. the retailer should confirm the pure gold weight in terms of 995.
  • Once a customer agrees to the deal, the retailer should procure the customer's KYC details (Aadhaar Card, address proof, mobile number, etc.) and take possession of the gold.
  • The retailer should then give the Reserve Bank of India (RBI) certified gold bought from the authorised dealer, Government of India Mint gold, or India Good Delivery Gold Bar in denominations of 100gms, 500gms, or 1,000gms along with the certificate and details of the customer for a deposit period of 3 or 5 or 8 years, depending on the customer's wish. The same transaction can also be done with digital gold.
  • RBI can fix the compounding interest rate accordingly, for example, at 1.5% for 3 years, at 2% for 5 years, or 2.5% for 8 years and so on.
  • On maturity of the deposit period, whatever compounding interest is accrued should be added in terms of gold with the deposited quantity.
  • RBI can give the gold deposited by customers to the banks instead of the banks getting gold loans from foreign suppliers. RBI can charge interest for it accordingly.
  • Presently, as per the income tax act, a married woman can own up to 500gms of gold, an unmarried lady up to 250gms of gold and a male family member is allowed up to 100gms, for which no questions are asked. The government can increase the same limits to 750gms to 1kg of gold for a married woman; 300gms to 500 gms for an unmarried woman; and 200gms to 300gms for a male family member. If these limits are maintained under the GMS scheme, no GST or capital gains tax should be charged.
  • On maturity, the retailer who has deposited the gold should produce an authorisation letter from the customer, and collect the gold in denominations of 100gms, or 500gms, or 1kg or multiples thereof. This can also be India Good Delivery gold.
As per Income Tax Act Current Proposed
Married Woman 500gms 750gms
Unmarried Woman 250gms 500gms
Man 100gms 300gms

Win-Win For All

While the new, proposed GMS hopes to unlock unused gold, it will not only benefit the consumer, retailer and banks, but the nation as well. By treating the gold deposit as a part of the Forex reserve, the scheme will reduce gold imports, improve the sovereign rating, and arrest the rupee's depreciation.

K. Srinivasan, convener of the gold jewellery panel, GJEPC, is optimistic about the success of the proposed GMS: "If retailers are given the responsibility of processing gold deposits from customers, the scheme will be a success. Jewellers have the ability to minimise the loss when melting gold and that will be an added advantage for the customer. These gold deposits will not attract GST or capital gains tax. If all the suggestions by GJEPC are accepted, I expect gold deposits of around 300 tons to be released in the first year itself."

With a stable rupee, investment earnings by global funds will increase in US dollar terms. Hence, the inflow of global funds will upsurge, pushing GDP and benefiting the economy in multiple ways. The Government shall get additional funds without creating pressure on the banks and without affecting the private credit demand.