Gold Monetization and Budget 2015

Economists consider gold as wasteful item, for them it as relic of barbarism. USA in 1930 was able to proscribe possessing private gold as an offence and turned it into government asset. But in India it is entirely a different picture and hence needed a unique solution to cater the Indian economic phenomenon. Gold in India is celebrated and associated to customs, cuffing the hands of the government to impose such restriction over possessions. Gold is considered as hedge fund and associated to status symbol especially in the deep orthodox society. Most of the gold possessed is in the form of ornaments.

Bringing this huge amount of gold in the formal financial market and make their productive usage remained a challenge. This challenge as is unique to India needs a solution unique to cater the problem.  India imports 800-1000 tonnes of gold every year, about 20000 tonnes of gold lies idle with Indian household. This huge amount of imported yellow metal adds pressure to current accounts. It is the second item after crude oil which adds burden to our import bill. Budget 2015 offered few schemes and alternatives to buying gold by offering the monetization of gold and sovereign gold bond.

Schemes announced in Budget 2015

Gold monetization would allow the depositors to get the interest on their deposited metal and Jewellers to obtain loan on the basis of their metal account. Bank and other dealers would also be able to monetize their gold.

Sovereign gold bond would be developed to provide an alternative to physical gold buying. It offers a fixed interest rate and can also be redeemable in cash.

Indian gold coined to be issued with Ashok chakra inscribed on it. It would reduce the demand of gold coins minted outside India and also helps to recycle the gold available in the country.

Impact on the economy

The government kept the import duty on gold unchanged to 10 percent to keep demands low. Sovereign gold bond can generate substantial buffer stock of gold that can be utilized in the international market. Indian household’s gold consumption is one fourth of the world’s consumption. It would also lead to create the refining and standardization infrastructure in the country which is absent till now. However huge amount of black gold could only be brought out by providing tax immunity to gold bonds. The gold monetization would help bring the privately possessed gold out of Indian household and channelize it into the financial market which could better be utilized in other developmental activities.