Gold is not just treated as an asset class in India; but looked upon as security by millions of Indians. Thus, although the country does not have dominance in gold mining it has amassed tonnes of precious yellow over centuries. So much so that, until recently, it accounted for nearly one-third of total demand for gold in the world and owned about 10% of above surface stocks of gold. Take your own example; it is likely that you own most of your gold in a physical form, either by the way of gold jewellery, gold coins and / or gold bars.

It is this insatiable appetite and flair to own the precious yellow metal that has kept gold imports buoyant. Nevertheless, it has exposed a risk of exerting pressure on the country's Current Account Deficit (CAD) as well.
 

India's buoyant gold imports

# Estimated
(Source: Finance Ministry, Reuters, PersonalFN Research)  

As a repercussion the Indian rupee has borne the brunt. In the year 2013 it hit an all-time low (of Rs 68) against the U.S. dollar and showed bearing on India's foreign exchange reserves.

The Federation of Indian Chambers of Commerce and Industry (FICCI) and the World Gold Council (WGC) gave recommendations to the Government of India on improving gold policy of the country. These included:
 

• Establishing an Gold Exchange in India
• Establishing a Gold Board
• Develop accredited refineries
• Allow Indian banks to use gold as part of their liquidity reserves
• Incentivise banks, revitalise Gold Deposit Schemes and introduce gold-backed investment
   

Taking inputs, the Government decided to put the idle gold to effective use and took measures to introduce Gold Monetisation Scheme vide its proposal in the union budget 2015-16; which thereby could aid in curbing gold imports. At present, it is believed that the blueprint of the Gold Monetisation Scheme is in the final stages.

So the question now is: should you be participating in the gold monetisation scheme?

To answer that, first let's assess the details of the Scheme…

Gold Monetisation Scheme is available to Indian entities and citizens of India satisfying certain conditions. Like in case of other investments, this Scheme too makes it mandatory for you to comply with Know Your Customer (KYC) norms and provide valid PAN details.

How does the scheme operate…
 

• You need to determine how much gold you want to make available under Monetisation Scheme
• Gold will be melted and quantity would be credited in the depositors' name
• The scheme will pay fixed interest on the gold holdings
• When you want to quit, you will be paid amount equal to the value of your gold holdings on that day
   

So, should you participate?
PersonalFN is of the view that, temples trusts and other institutions holding huge gold reserve may benefit immensely from the scheme.

As far as individuals are concerned, you need to be careful of a few things before you monetise your gold and start earning interest on it.

Positives of the Scheme:
 

• The Gold Monetisation Scheme solves your problems associated with keeping your gold safe
• It reduces the cost involved in holding physical gold
• It allows you to earn interest income on idle gold holdings
   

Nevertheless since the gold deposited by you under the Scheme will be melted – it's a big negative. In India people hold gold with a lot of emotional value (apart from financial reasons). So, when it comes to melting gold jewellery held over the years, many may not be comfortable, although the Government is unlikely to ask people depositing family jewellery to show past wealth tax payment.

Gold holdings in the form of coins and bar may find its way to Gold Monetisation Scheme. But here too PersonalFN is of the view that there would be limitations. This is because often gold coins and bars are bought with emotions and objective in mind – such as converting them into jewellery for children's wedding or even for deity.

So while the Government has introduced this Scheme with the object of lowering gold imports and reduce CAD, it may not produce the desired results.

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