Sovereign Gold Bond / Gold Monetization Schemes: Review of Performance

India's Current Account Deficit and Fiscal Deficit have been weighty issues for a while and
require urgent attention and amelioration, and the government of India's two gold schemes,
launched in November 2015, aim to do just so. They were introduced to reduce the demand
for physical gold and direct a part of it towards financial savings. But their tenure of two
years has been somewhat disappointing. Let's review them to know why exactly they didn't work
out and what reforms could have been done.

Indias craze for Gold

Gold works golden and stands by its name in testing times. It is one of the safest
investment when a country suffers from inflations as you cannot set a fixed
value regarding its weight or amount and both of them cannot be discredited as
unlike currency, the markets do not determine gold's worth, and its liquidity
provides financial insurance in the markets. Thus, the craze for gold is
apparent and justified. The World Gold Council has reportedly found that there

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are 25,000 tonnes of gold, worth half of our GDP, just sitting idly in our homes
and temples.

Government Schemes

It would immensely help to boost the economy if all the private gold somehow
wasn't stationary but a part of some moving chain, causing its circulation. Gold
deposit schemes were, hence, introduced. But the outcome, whether favorable or
not, depends on various factors:
1) These schemes should be attractive enough regarding interest.
2)The government should provide some form of immunity and support to
individuals who bring private gold into the market as there is no formal account
maintained for it.

In 2015, the two schemes were launched:

Sovereign Gold Bonds

Important features of SGBs were:

RBI, on behalf of the Indian Government, issues them.
They are denominated in rupees and in grams of gold.
Only available for sale to the resident Indian entities, both in demat and
paper form.
The minimum and maximum investment limits are 2 grams and 500
grams of gold per person per fiscal year respectively.
The rate of interest for the year 2015-16 was 2.75 per cent per annum,
payable on a half yearly basis.
The tenor of the Bond is for a period of 8 years with exit option from 5th
year onwards.
Exemption from capital gains tax is also available.

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 Redemption is made in rupee value equivalent to the price of gold at the
time of maturity.
Gold Monetization Scheme

Important features of GMS are:

People can open Gold Saving Account in designated banks and can
deposit physical gold through BIS certified collection, purity testing
centres (CPTCs). The minimum amount of gold to be deposited is 30
gms, with no upper limit.
There are three terms for which the gold can be deposited: short term (1-
3 years), medium term (5-7 years) and long term (12-15 years).
The gold thus collected is sent to refineries and banks that have tripartite
/ bipartite agreements with refineries and CPTCs.
On maturity, people can get back the cash or physical gold for short term
deposits and cash only for long term deposits.
For the year 2015-16, interest rates were fixed as 2.25 percent and 2.5
percent for the medium and long term respectively.
Tax exemption are same as those available under GDS 1999.

Performance So far

The above two schemes failed to produce satisfactory results as out of the 25000
tonnes that were estimated; they could not mobilize even 10 tonnes and could
only cater mostly to the mobilization of temple gold. The reasons resulting in the
schemes' failure are:
Most gold is unaccounted for, and people have this inherent feeling of
having satisfaction from possession that they do not wish to bring out their
physical gold.
The government failed to come up with relevant operating guidelines for
banks/refineries/collection centers. Moreover, they were unaware of how

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 the government planned to reimburse the interest and how they know that
the jewelers received more confidence than them for gold.
Banks did not regard deposits lower than 500 gm as an accomplishable
business.
A low number of refiners (only 10) and gold collection centers (50) were
licensed to accept gold and to further add to this plight, very low-interest
rates, and a terrible marketing strategy was carried out.
Current Status and Revival

NITI Aayog has made itself open to taking suggestions on reviving these
schemes. Among many suggestions, one suggestion stated that it would be
wiser on the government's part to involve jewelers as the consumers seem to
rest their trust a lot in them. Thus, BIS certified jewelers should be given the
responsibility to collect gold on behalf of the banks; and banks should accept
their acknowledgment for opening and crediting the depositor's accounts.
Recently the Union Cabinet also approved the revision of the Sovereign Gold
Bonds (SGB) Scheme by increasing the upper investment limit per fiscal year to
4 kg for individuals, 4 Kg for Hindu Undivided Family (HUF) and 20 Kg for Trusts
and similar entities notified by the Government at regular intervals.

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