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New focus on PM Modi’s plan to unlock gold with widening trade gap

PM Modi’s plan to unlock gold gets new focus with trade gap close to record

India’s widening trade deficit is highlighting a curious government plan to bridge the gap: by getting people to hand over their private stockpile of gold jewellery.

Prime Minister Narendra Modi and his government are trying to convince gold-crazed citizens – who collectively own the world’s largest private holding of bullion – to deposit their coffers in banks and earn interest.

The scheme, which dates back seven years, has been a resounding flop, luring only 25 tonnes out of the World Gold Council’s estimates of 25,000, which are near homes and temples in the South Asian nation.

But now, the impetus behind it – curbing India’s massive gold imports and reducing the trade deficit by melting the metal already in the country and reselling it – is of new relevance as the rupee depreciates and the trade gap reaches record highs. gets closer. In July.

“If you can recycle the existing gold back home, the dependence on gold imports is reduced and this will reduce the pressure on the current account deficit,” said Madhavi Arora, principal economist, Emkay Global Financial Services Ltd. And you can also monetize gold as a means to raise money. ,

Sakshi Gupta, principal economist at HDFC Bank Ltd, said when it comes to efforts to reduce India’s import bill – be it on gold or oil – “every percentage point counts at the moment.”

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In July, the government tried to discourage bullion buying by bringing import tax on gold to an all-time high. But the fall in global prices compounded the impact. This is evident during the current Indian festival season – a time when gold demand is at its peak, especially during Diwali.

Modi’s program, originally set up in 2015, allows people to deposit their gold in a bank for a period of one to 15 years in exchange for an interest payment of up to 2.5% on the value of the metal and back. promises to do. An amount equivalent to gold or cash at the end of the period. The metal is then melted down and resold, theoretically to boost local supply and reduce imports.

As compared to the interest rate on the Gold program, State Bank of India offers a rate of 5% to 6% on fixed cash deposits for the same time frame.

The challenge for Modi is that gold is an emotional purchase for Indians. Jewelry plays an important role in weddings and festivals, with bracelets, rings, necklaces and earrings often handed down through families. A major shortcoming of the program is that the jewelry is melted to check for purity before resale, meaning that depositors may never get their beloved inheritance back.

Temple Treasures

This is where temples come in. Reputable institutions, managed by trusts empowered by law to act on behalf of a deity, play an important role in Indians’ relationship with gold. Devotees donate metal to deities to express gratitude – for example for the birth of a child – leaving temples with vast reserves of treasure. The Trusts are estimated to have about 4,000 tons, reserves as large as the US Bullion Depository at Fort Knox.

According to Ashish Pethe, president of All India Gems and Jewelery Household Council, temple trusts are crucial to the scheme and the government should work with them.

“At least 10 to 15 trusts have huge amount of gold, so it will be a big relief if some amount of gold comes out from them,” he said.

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So far the temples are collecting about 200 to 500 kilograms (440 to 1100 pounds) of gold in small quantities. But this is nothing compared to what is required for the program to work, according to James Jose, managing director of leading Indian gold refinery CGR Metalloys Pvt Ltd.

Surendra Mehta, national secretary, India Bullion and Jewelers Association Ltd, says that difficulties arise in allowing all trustees of temples to melt the gold deposited under the scheme and risk harassing their devotees.

generational value

Most Indians, like Aditi Das, are happy to pay the bank for the security of their jewelry in a locker rather than earn interest by depositing it in the same bank under a government program. The newlywed 32-year-old researcher said the scheme didn’t appeal because of the “generational value” of her jewelry.

“Most of my gold is inherited jewelry and has sentimental value and the thought of melting it is not comforting,” Das said. “Whether it is a gold coin or a gold bar, it is bought on special occasions, and so I would not be comfortable giving it away for such a scheme.”

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Another hurdle, Pethe said, is the operational aspect on the ground. Pethe said there should be flexibility in how long gold is deposited and “no question should be asked” about proof of purchase to a certain extent, as people who have inherited the gold have It is often difficult to prove ownership.

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The deposit scheme and the related Sovereign Gold Bond Scheme, which allows an investor to buy a bond at the value of gold without any underlying physical asset, are “far from successful”, accounting for less than 2% of India’s annual gold consumption. represents less. According to MK Arora.

Nevertheless, instead of scrapping the scheme, the government should consider amendment by saving deposits in banks from tax department scrutiny and other tax exemptions to the extent of about 100 grams, he said.

“Dormant gold stocks need to become part of the mainstream capital raising mechanism,” she said. “It is the only efficient and productive way to optimize existing gold stocks.”

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)

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