An astounding 20,000 tonnes of gold is held by Indian households. In fact, we are the largest consumers of gold in the whole world. From the government’s standpoint this is largely an untapped asset – an asset that sits in lockers or gets passed in families. It’s heavily bought on Diwali, in fact on most celebrations. All most all of this demand of gold leads to an increase in import of gold. Simply put – high value imports are bad for the economy (and conversely high value exports are good for us).
Government has put up 2 proposals to monetize this large reserve of gold
- Ask people to deposit their gold in metal accounts and earn an interest on it – allow withdrawals after a fixed period
- Sell Sovereign Gold Bonds – which are linked to the value of gold and these shall redeemable for the value of gold.
Our attachment to gold is largely ‘emotional’. We hold on to gold and it’s considered inauspicious in a way in Indian households to sell family gold. Family jewels are worn with pride. Depositing such gold in metal accounts may need a mindset shift for many of us. In these metal accounts – the gold shall be further lent to jewelers while depositors can earn interest and at the time of withdrawal don’t get back metal in its original form. The success of this scheme will also depend on the interest the government is willing to provide on these deposits. If this is not attractive – the scheme may not have the desired effect. After all, it’s hard to part with gold which won’t come back to you in its original form and does not earn you a reasonable interest either.
Gold Funds and Gold ETFs have already been in existence, but haven’t seen much favor with our gold crazy population. Their value is linked with gold prices and therefore the returns are similar to gold. People still crowd jewellery stores on weddings and around diwali. Physical gold hasn’t lost the luster yet!