(Mike Maharrey, Money Metals News Service) The Indian government plans to expand a program designed to incentivize people to turn in their gold after the original plan fell flat.
In 2015, the government created a gold monetization scheme (GMS) to encourage Indians to put “idle” gold into the country’s financial system. Under the plan, individuals can deposit as little as 10 grams of gold into an account maintained by a commercial bank.
After being tested for purity, the gold is melted and refined into standard .995 purity bars. Depositors receive interest in rupees. At the end of the term, depositors receive their choice of an equivalent quantity of gold or the value in rupees at the current gold price.
Initially, the program included short-, medium-, and long-term deposit options. However, the medium- and long-term variants were discontinued last year, while the short-term program remained in effect with terms from one to three years.
Officials hoped the plan would incentivize Indians to turn in some of their gold. This would lower the country’s dependence on imported gold.
In 11 years, the GMS monetized only 39 tonnes of gold.
That may sound impressive until you realize that the government estimates Indians hold nearly 30,000 tonnes of gold.
Indians value the yellow metal as a store of wealth, especially in poorer rural regions. Around two-thirds of India’s gold demand comes from beyond the urban centers, where large numbers of people operate outside the tax system. Many Indians use gold jewelry not only as an adornment but also to preserve wealth.
According to a 2018 survey, 87 percent of Indian households owned some gold. Even households at the lowest income levels in India hold some of the yellow metal. According to the survey, more than 75 percent of families in the bottom 10 percent of income managed to buy some gold.
The government would love to ratchet some of that gold out of the public’s hands. Lowering gold imports would help the country’s trade deficit. Beyond that, gold fuels India’s black market, and the government wants to “legitimize” that large segment of the Indian economy. (By legitimize, I mean tax.)
The new monetization scheme will reportedly allow jewelers to participate in the program. Industry officials say the government hopes to have the new program in place before the fall festival season.
“The government is seriously examining the proposal to bring jewelers under the scheme because their involvement can help channel idle household gold into the formal system,” a senior gold trade official told the Times of India.
Jewelers would serve as collection and aggregation centers to channel the gold to authorized refiners. In return, they would receive a handling fee. They would also have access to monetized gold, providing jewelers with a “dependable and relatively lower-cost source of raw material,” while lowering dependence on imports.
The problem with this program is that most Indians would rather keep their gold in their hands.
This isn’t the first time government officials have tried to lower gold imports by discouraging gold “hoarding.”
In 2016, the government implemented tax reporting requirements, requiring customers making gold purchases over 200,000 rupees to disclose their tax ID, known as a Permanent Account Number (PAN). Instead of forcing these large transactions into the light, the regulation drove many dealers into the underground gold trade. According to a Reuters report at the time, “Some jewelers [are] moving to unofficial trade from official. No one wants to lose customers just because they don’t have a PAN card.”
Of India’s 1.25 billion people, only 223 million held PAN cards when the law went into effect
Instead of complying with the regulation, many dealers simply split large transactions into multiple smaller invoices.
You can see why the government wants to stop the flow of gold into these areas. The yellow metal allows people to hold on to their wealth outside the official system. But no matter what the government does, it fights a losing battle against much stronger cultural and economic realities.
Indians also understand that their gold holdings can become a lifeline during a crisis. For instance, after the Indian government locked down the country during the COVID pandemic, banks tightened credit to mitigate the default risk. Unable to secure traditional loans, Indians used gold to secure financing. As Indians endured a second wave of lockdowns, many resorted to selling gold outright to make ends meet.
You can use your gold during a crisis if you don’t have it in your possession. This explains why, despite the monetary incentive, most Indians ignored the monetization program. In all likelihood, the expanded scheme won’t fare much better.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
