Gold Monetization

Scheme: Its implications

on Indian Economy

Submitted by: Group 1

Aayush Jain (UM15311)
Asutosh Patro (UM15321)
Kiran Sundar Hande (UM15331)
Pratik Kumar (UM15341)
Sanjog Saran (UM15351)
Srusti Pradyota Dash
(UM15361)
Vidish Mantri (UM15371)

Gold Monetization Scheme: Its implications of Indian economy

Table of Contents
1. Objective

2. Importance of Gold 2
3. Demand and Supply of Gold

4. Economic Contribution of Gold

5. Pricing of Gold4
6. Gold money rift

7. Gold Deposit Scheme, 1999

8. Gold Monetization Scheme, 2015

9. Macroeconomic Impact
10. Challenges

11. Conclusion

References 10
Annexure-I: List of Tables

11

Annexure-II: Process of gold monetization

12

1 | Page

Gold Monetization Scheme: Its implications of Indian economy

1. Objective:
The objective is to study the Gold Monetization scheme, its need and effects. The study also
gives a brief overview on demand, supply and economic contribution of gold in India and how
gold monetization scheme affect them. The study also explains the variations in macroeconomic
variables like unemployment etc. followed by the challenges it faces.
2. Importance of Gold:
Gold has always been an integral part of the socio-economic ethos of the Indian household.
Whether purchased for personal consumption or as an investment or a gift, this is the one
commodity which invariably exists in the portfolio of every Indian household. This has been
continuing for generations too when India was formerly referred to as Sone ki chidiya or the
Golden Bird.
Its only because of the importance of gold in Indian household that the policies on gold
formulated by the government are based on a set of assumptions which might not hold true for
any other nation. These assumptions are

Price of gold in India will never wane.

Indians will never part with their gold easily.
Women have a great deal of sentimental value attached with gold jewellery and they will
never part with their jewellery.
Even between cash and gold, people here will always opt for gold as it holds a higher
value in their minds than cash.

All these assumptions only highlight the basic fact that we Indians value our gold more than
anything.
Let alone the common man, even the government of India used 67 tons of its gold reserves back
in 1991 to secure an emergency loan of $2.2 billion from the IMF to get itself out of a tight spot
and clear its balance of payment dues. So much is the importance of gold in peoples minds that
the same government which issued the gold airlift collapsed within a few months of doing so.
But, of late survey results have shown that this love for gold is diminishing, opening gates for
policy makers to find ways to monetize this enormous amount of gold stored in Indian
households.
3. Demand and Supply of Gold:
Demand for gold in India is interwoven with culture, tradition, the desire for beauty and the
desire for financial protection. It is used as jewellery and as an asset. Over the past five years,
annual demand has averaged 895 tonnes, equivalent to 26 per cent of total physical demand
worldwide. . However, as India has little domestic supply of gold, demand is primarily satisfied
by imports. Gold is the safest instrument to protect their savings from inflation, currency

2 | Page

Gold Monetization Scheme: Its implications of Indian economy

depreciation and also can be easily liquidated in case of family emergency during their absence.
However investment demand surged to 29% to 266 tonnes in the year 2013.

Fig1: Consumer demand and imports

700
600
500
400
300
200

Fabrication
Demand(tonnes)
Investment
Demand(tonnes)

100
0

Rise and fall in equity market also

affect the investment demand of gold. When market is bullish, investors liquidate their gold
holdings and invest in equities. This heavy sell off is absorbed by jewellery fabricators.

3 | Page

Gold Monetization Scheme: Its implications of Indian economy

However, as India has little domestic supply of gold, demand is primarily satisfied by imports.
The cost of these imports is responsible for todays current account deficit (CAD) and the
amount of foreign exchange spent for gold is significant. Time and again government comes up
with policies to curb this demand of gold. In many countries where domestic mined production is
low, recycled gold makes significant contribution to supply. In India this has rarely been the case.
However, recent data indicates that recycling can play a part in the Indian gold market.
Domestic recycled gold increased 29 per cent to 116 tonnes in 2009, following a sharp spike in
gold prices. Recycled supplies rose from 59 tonnes in 2011 to 113 tonnes in 2012 and 101 tonnes
in 2013, following government restrictions and a depreciation in the rupee. Moreover, our survey
reveals that Indian consumers are willing to recycle their gold, armed with appropriate
incentives. The major countries India imports its gold from are Switzerland, U.A.E, South
Africa, Australia, U.S.A, Hong Kong, U.K., Germany, Chinese Republic and Netherland.

Fig 3: Gold demand vs Gold supply in 2013

4.

Gross value added (in $ billion)

0% 5%
40%

55%

Economic Contribution of Gold:

Consumption (gold bar and

coins)

Jewellery fabrication and

consumption

Technology fabrication
demand

Recycling

Fig 2: Fabrication demand vs Investment demand (in bars)

Indian gold market is primarily driven by

Fig 4: Value addition in different component of demand
consumption and fabrication of gold. Both
have significant impact on economic value
addition, adds to GNP contribution to foreign exchange and balance of trade. As per report
commissioned by world gold council, PricewaterhouseCoopers estimated that gold has
contributed to $30 billion to Indian economy in the year 2012.

5. Pricing of Gold :
4 | Page

Gold Monetization Scheme: Its implications of Indian economy

Contrary to popular belief, the precious metals, gold and silver, are not traded on the London
Metal Exchange, but on the over-the-counter market usually referred to as the London Bullion
Market. The LME works with the precious metal community to help deliver pricing solutions for
the benefit of the whole market which is determined by forces of demand and supply.

Fig 5: Gold prices in rupees per ounce

6. Gold Money Rift:

Under international Gold standard, if a country's economy did not fare well with too much
money supply in relation to production and trade, its reserves would go down, as because of
inflation in that country, exports would go down, and imports would increase. The outflow of
Gold would automatically lead to a rise in interest rates, reduction in domestic credit and money
supply, and a relative fall in prices in relation to those abroad. These would lead to a resurgence
of exports and Gold reserves would be replenished. When internationally Gold supplies were
5 | Page

Gold Monetization Scheme: Its implications of Indian economy

augmented, the world money supply would go up and consequently there would be a rise in the
price level the world over. But if the growth of Gold supplies was lagging behind world
production, the general prices of world commodities would be going down. Any country which
had a productivity advantage would find its prices of exports relatively lowered; and with larger
exports its Gold reserves would move up and money supply would also go up in that country.
Consequently, prices in general would go up. Hence its relative advantage would be reduced. The
world as a whole would be getting the benefit of the productivity improvements in that country
through lower prices of such commodities. This was one of the key points stated by C.N. Vakil
and a group of 140 economists in a memorandum to the Government known as SEMIBOMBLA
(Scheme of the economists for the Monetary Immobilization through Bond Medallions and
Blocked Assets). The objective was to achieve 30% cut in money supply to control inflation.
7. Gold Deposit Scheme, 1999
The Central Government, with a view to bring privately held stock of gold in circulation, reduce
the countrys reliance on import of gold and providing its owners with some income apart from
freeing them from the problems of storage, movement and security of gold in their possession
had notified Gold Deposit Scheme 1999 on September 14, 1999. Then RBI on 5th October,
1999 had formulated guidelines for Gold Deposit Scheme to enable banks authorized to deal in
gold to prepare their own Gold Deposit Schemes. Thus, we can say Gold Deposit Scheme was
introduced in 1999 by GoI and was to be implemented through Banks as per guidelines framed
by RBI with the following purpose:

To mobilize the idle gold in the country so that the same can be put into productive use
To provide an opportunity to the gold holders, to earn interest income on their idle asset
(gold) with safety, liquidity and tax benefits, and continue to enjoy the appreciation in the
gold prices

Reasons behind the miserable failure of GDS are follows:

The increase in gold demand would more or less match the quantity of gold deposited
under the GDS.
The government would lose a lot of money if rupee devalues sharply against US$ or POG
rises sharply during the tenure of deposit.
Interest earned on gold certificates is not taxable while interest income on rupee deposits
is taxable.
8. Gold Monetization Scheme, 2015
The objectives of the Gold Monetization scheme are:

To mobilize a part of an estimated 20,000 tonnes of gold held by households and

institutions in the country
To provide a fillip to the gems and jewellery sector in the country by making gold
available as raw material on loan from the banks.
To be able to reduce reliance on import of gold over time to meet the domestic demand.
6 | Page

Gold Monetization Scheme: Its implications of Indian economy

Purity
Testing

Deposit

Gold savings
account

Transfer of
gold to
refineries

There are two different gold deposit schemes as under:

8.1 Short Term Bank Deposit (STBD)

Period: 1-3 years (with a roll over in multiples of one year)

Liability of banks
Interest rate: As per discretion of bank
Premature withdrawal subject to such minimum lock-in period and penalties
Redemption of principal and interest at maturity: Indian Rupee equivalent of the
deposited gold and accrued interest based on the price of gold prevailing at the time of
redemption, or in gold.

The deposit will attract CRR and SLR requirements as per applicable instructions of RBI from
the date of credit of the amount to the deposit account. However, the stock of gold held by banks
in their books will be an eligible asset for meeting the SLR requirement in terms of RBI Master
Circular - Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) dated 1 July 2015.
8.2 Medium and Long Term Government Deposit (MLTGD)

Period: 5-7 for medium term and 12-15 years for long term
Interest rate: 2.25% on medium term and 2.5% on long term
Liability of central government
Premature withdrawal: Minimum lock-in period and penalties as per Central
Government.
Redemption of the
Fig 5: Gold prices in rupees per ounce
deposit including
interest accrued will be only in Indian Rupee equivalent of the value of the gold and
accumulated interest as per the price of gold prevailing at the time of redemption

8.3. Utilization of Deposited Gold

CRR/SLR: Deposit the mobilized gold as part of their CRR/SLR requirements with RBI
7 | Page

Gold Monetization Scheme: Its implications of Indian economy

Foreign Currency: Generate foreign currency for onward lending to exporters / importers
Coins: Convert mobilized gold into coins for onward sale to their customers
Exchanges: Trade on domestic commodity exchanges

8.4. Lending to jewellers

This follows double entry book keeping. The process can be summarized as:

Gold Loan Account: On the basis of the terms and conditions of the banks, jeweller will
get a Gold Loan Account opened at the bank
Delivery of gold to jewellers: When a gold loan is sanctioned, the jewellers will receive
physical delivery of gold from the refiners. The banks will in turn make the requisite
entry in the jewellers Gold Loan Account.
Interest received by banks: The interest rate charged by the banks will have to cover the
interest rate paid to the depositors of gold, fee paid to the refiners and Purity Verification
Centres, profit margin of the banks
9. Macro-Economic Impact:
Current Account Deficit: This gold monetization scheme and Sovereign Gold Bonds
scheme will help in reducing the demand for physical gold. Demand for gold in country
is majorly met through imports; this scheme will help in maintaining Indias Current
Account Deficit. It is expected that gold monetisation will lead to government savings of
$8 billion in the first year.
Unemployment: The liquidity of gold will boost jewellery and gems industry. Jewellers
can easily get gold on loan and perform value addition. Thus generating employment
opportunities.
GDP - Incremental gold demand in India is largely met by imports, with net imports
worth 1.7% of gross domestic product (GDP) in financial year (FY) 2015. Around 700900 tonnes of gold are imported every year by India and it accounts for a significant
portion of physical demand. So if demand of gold decreases, the imports will decrease
resulting in an increase in GDP. Also decrease in unemployment and value addition in
fabrication will increase GDP.
SLR/CRR- Banks can use the mobilized gold as part of their CRR/SLR requirements with
RBI which help in increasing the cash liquidity with banks and effectively give boost to
RBIs effort of banks transferring the repo rate cut to the end customers with decrease in
borrowing rate.
Consumer Price Index (CPI) - There is a positive correlation between consumer price
index (CPI) inflation and gold purchases. There has been a 28% increase in the price of
gold in terms of rupee over the past 5 years. So if gold demand decreases due to decrease
in demand of gold because of gold monetization scheme the CPI would decrease.
Foreign Exchange Reserves: A big chunk of forex reserves is spent on mee1ting the
demand of gold in the country and this can be saved if GMS is successful. This forex can
be used for other purposes.
8 | Page

Gold Monetization Scheme: Its implications of Indian economy

Boost to overall demand: Since gold imports amount to almost about 1.7% of GDP, if
government is able to save even 0.1 % of GDP due to decrease in imports and invest
those money in economy it will generate about 0.33 % of GDP as income (Average
Multiplier value in India).This 0.33 % would effectively increase the consumption of
people by 0.231 % of GDP (MPC in India is 0.7) which would boost the private sector.
Impact on stock-exchange: Stock investors keep a track of long term trade deficit of the
country. Since India largely depends on gold imports which contributes considerable
amount to trade deficit, reduction in trade deficit due to gold monetisation and bond
schemes would help in strengthening investors outlook towards country. Effectively
strengthening stock exchange as is observed in the case of Turkey.

10. Challenges:
There are several challenges that hinder GMS to achieve its objectives, such as:
a. Risk Management
The risk management of Gold Monetization Scheme is crucial for the banks. The bank would
give interest in gold while it gets interest from the jewelers in cash. This anomaly might put a
challenge before the banks if gold prices rise swiftly. The increase in interest rate parallel to
the price rise of the gold may go out of scope for banks. This situation can put banks to loss.
b. Source of Funds
The government has not clarified the rules for unaccounted gold. The most of household gold
in India is unaccounted. People generally do not have the receipt of family gold. On the other
hand, the government is talking tough about the black money. The strict posture of
government on black money may deter many potential depositors. They would not be able to
tell the source of funds of the gold.
c. Cultural Challenges
The Indian people value the gold as an investment, but more than that it is a prized
possession. Parting the gold jewelry for a small interest would be very difficult for them.
Also, gold jewellery, especially inherited, has sentimental value and many won't like to see it
melted down. However, convincing people to actually melt them for a minuscule return of
will be very difficult while they are losing out on making charges of the ornament.
d. Other Challenges
The gold deposited has to be pure 24 carat gold while in jewellery the purity of gold varies
between 20-23 carats. Amount paid on taxes, making charge, stones and gems, silver/zinc
used is not accounted and this loss is on depositor.
11. Conclusion:
The response Gold monetization received was quite lukewarm. Only 400gms of gold was
deposited in first two weeks. The major reason behind such a muted response is explaining the
source of gold thereby income tax. Very recently, temple authorities of Tirupati Balaji and Siddhi
9 | Page

Gold Monetization Scheme: Its implications of Indian economy

Vinayak temples have shown their interest towards gold monetization scheme. Both have
planned to stash in 1.5 tonnes and 160kg respectively. For bankers, in order to mitigate situation
of fluctuation in prices, the government will be creating a gold reserve fund to bear risks arising
out of variations in gold prices. The benefit to the Government through the reduction in the cost
of borrowing would be transferred to the Gold Reserve Fund. The fund would get money from
the government. Since, the Government would reduce its borrowing cost because of this scheme;
the benefit would be transferred into the gold reserve funds. Possible measures to boost this
schemes are increasing the interest rates so that depositor can cover the losses, providing tax
benefits to depositors, create awareness through television advertisements. RBI Governor
Raghuram Rajan has made statement We need some tuning which indicates these fallacies has
been identified and shall be addressed by RBI and GoI. Gems and Jewellery industries are very
excited with this scheme and are involved in making this scheme lucrative.

References
[1] Draft Gold Monetization scheme MyGov
[2] Government to discuss changes to gold monetization scheme after muted response
http://articles.economictimes.indiatimes.com/2015-11-30/news/68661731_1_gold-depositscheme-banks-first-source
[3] RBI notification: Master Direction No.DBR.IBD.No.45/23.67.003/2015-16 (Introducing
Gold Monetization Scheme)
[4] RBI notification: DBR.IBD.BC.53/23.67.003/2015-16 (Interest Rates)
[5] @book{gandhi2003globalised, title={Globalised Indian Economy: Contemporary Issues and
Perspectives}, author={Gandhi, P.J.}, isbn={9788176294416},
url={https://books.google.co.in/books?id=qgMeXF9KEJIC}, year={2003}, publisher={Deep \&
Deep}}
[6] GFMS gold survey report 2014
[7] FICCI World Gold council report on Why India needs a gold policy
[8] http://in.reuters.com/article/india-gold-idINL3N13P3CK20151130
[9] http://www.moneylife.in/article/will-the-new-gold-monetisation-scheme-work/43941.html
[10]http://www.allbankingsolutions.com/Banking-Tutor/Gold/Gold-Deposit-Scheme-1999.htm
[11] The Economic Times articles on Gold Monetization Scheme
http://economictimes.indiatimes.com/topic/Gold-Monetization-Scheme
[12] Five year gold prices: http://www.bullion-rates.com/gold/INR/Year-5-chart.htm
10 | P a g e

Gold Monetization Scheme: Its implications of Indian economy

[13] World Gold Council Press Release (Tuesday 8th October, 2013): The direct economic impact
of gold by PricewaterhouseCoopers

11 | P a g e

Gold Monetization Scheme: Its implications of Indian economy

Annexure I: List of Tables

Yea
r
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3

Fabrication
Demand(tonnes)

Investment
Demand(tonnes)

Domestic Production
(tonnes)

465.2

76.2

3.5

540

102.8

470.9

139.8

2.5

521.7

148.6

2.9

533.7

159.9

2.6

387.9

117.5

2.1

604

266.3

2.8

608

288

2.3

505.2

205.9

1.7

265.8

506.6

Table 1: Demand and Domestic production

Component of demand
Consumption (gold bar and coins)
Jewellery fabrication and
consumption
Technology fabrication demand
Recycling

Gross value added (in $

billion)
17.6

% of
total
54.83%

12.8
0.1
1.6

39.88%
0.31%
4.98%

Table 2: Component of demand and value addition

Ye
ar
200
0
200
1
200
2
200
3
200

Annual Average
Prices (Rs/10g)
11,013

10,480
11,555
12,193
12,792
12 | P a g e

Gold Monetization Scheme: Its implications of Indian economy

4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3

12,943
16,833
16,593
20,085
22,634
24,266
29,104
32,963
29,310

Table 3: Real gold prices in INR (CPI deflated- Constant 2013 money terms)

13 | P a g e

Gold Monetization Scheme: Its implications of Indian economy

Annexure-II
Gold Monetization Process Flow

14 | P a g e