Gold Monetization Scheme and Bond Scheme [ Detailed Analysis (CA/GS) - Economics ]
The effectiveness, the all-new Gold Monetization scheme of the central government is still somehow doubtful. Experts have critically analyzed all the aspects of these schemes and they have concluded that if not properly tackled then this scheme will create many types of difficulties. So here we are going to discuss some of the difficulties but first let’s understand what, how and why GMS
What is GMS?
- First it mobilizes the gold consumed by households and other institutions of the country.
- After mobilization it makes gold accessible to banks and Jewelers.
- Then it reduces gold imports due to mobilization.
- After reducing imports on gold, it improves liquidity in market.
- Then finally it provides secure access to customer’s gold
- The Indian government actually wants that Indian institutions and households who supply gold will provide the gold to economy and in turn earn interest from it.
- The government takes this gold and circulates it in economy, which will minimize gold import burdens. This gold becomes an Investment vehicle for gold householders or institutions holders.
How GMS works?
- The interested households or institutions have to open gold saving account with bank.
- Then purity of the gold which customer wants to deposit will be checked at accessing centers after cleaning.
- Then receipt will be generated by accessing center, which will be provided to customer.
- At the same time as saying, center also informs bank about the value to be credited to customer.
- Then the gold will be sent to refineries for melting or storage.
- Banks inform refineries to send gold to jewelers.
- Finally refineries send gold to jewelers based on the information provided by banks.
All this process is described in following diagram
- Here are the answers to all questions as to why Indian government proposed GMS?
- Around 20.000 tons of gold is held by Indian households and institution with a total worth of $1 trillion.
- $1 trillion makes up more than 50% of the GDP (Gross Domestic Product) of nation.
- Mobilizing and Monetizing even a small percentage of unused gold will reduce huge amount of gold import requirements of India.
- If it is possible then more money will be available in Indian market which will enhance Indian economy.
- In addition, we can divert this increased liquidity on other aspects such as healthcare, education, aquaculture, transport infrastructure development, repayment of international debt etc.
Benefits of GMS
- Customer will earn interest (2.25% to 2.5%) on their idle gold thus, adding value to their savings.
- The scheme reduces gold import for our country.
- This is flexible schemes so that customers can withdraw their investment/gold when they need it.
- Customers can starts investment from 30gm of gold.
- No limits on Maximum Investment.
How do the banks utilize the accumulated gold?
Here are ways using which the banks can utilize the gold reserves:
Lending to Jewelers
Banks earn interest on gold by giving it to jewelers reducing the total gold import.
Invite Foreign Currency inflow
The gold can be sold to the other counties and inviting foreign currency. Foreign exchanges helps stabilize Indian Rupee.
Use Gold to Meet CRR and SLR Requirements
The two basic requirements of Banks to stay operational are:
- Cash Reserve Ratio (CRR)
- Statutory Liquid Ratio(SIR)
Nation has to maintain cash reserves with RBI for unexpected liquidity mismatch and to prevent bankruptcy. Banks are allowed to maintain CRR and SLR using the mobilized gold which enabling them to circulate more money in economy.
Problems with GMS
- Following are some of the problems in implementation of GMS
- Indian people are attracted to gold not only because of its value but also because of cultural aspects. Especially in South India, so liquidating gold might not be acceptable to Indian customers.
- Most of the people do not have proper documents proving the ownership of gold, which they want to invest.
- Banks will pay interest to depositors in gold and earn interest from jewelers/borrowers in cash, which creates the risk of mismatch, leading to catastrophic results.
- The banks will not permitted to make CRR and SLR deposits in gold by RBI because CRR deals with liquidity mismatch and using gold as CRR is risky due to continuous change in gold prices.
- Published on: September 22, 2016