Government’s Goldberg

It’s surprising how most of my writing happens on Wednesdays; maybe I need to consult an astrologer to find out why. OK so today’s big news in the paper this morning was the Gold Monetization scheme. Gold Monetization is where Gold will be treated like Cash. 

This scheme was announced by the Finance Minister Arun Jaitley in this year’s Budget. The scheme is a two pronged answer to the Indian obsession with Gold.

1.       The scheme shall allow public to deposit gold in scheduled banks and earn interest on their gold.

2.       The scheme allows Banks to use the gold received in this scheme to meet the CRR and SLR requirements.

So what does this mean?

Simply put, you and I can deposit our gold in the bank and earn an interest after a fixed maturity period. How does this happen? Well it works just like cash, the Bank will measure, test and tag your gold, and then lend it to jewelers or other investors who may be willing to buy or borrow at a rate higher than the banks offer to pay you. The interest earned in this scheme is not taxable under income tax or tax from capital gains. Please note that interest will be calculated in terms of gold. That is, if you deposit 50g of gold, 10% would be 5g of gold.   

This brings us to some simple but genuine questions

1.       How will they pay interest? Will they add another gram to my bangle? 

Well, no… Your gold will be treated just like cash. Meaning, you will not get to see the same gold bangle at maturity. If your bangle was 50g, then you will get 50g back + interest, but not in the same bangle. You may get the maturity amount as bullions of gold or you also have an option of redeeming it in cash. However there’s a catch, you need to specify if you want gold or cash while signing up for the scheme.

I’ll say what you’re thinking now… Nope, not gonna happen! My mom would never lose her bangles for 5% or 10% or even 30% if she’s never going to get a chance to see the bangles again. 

So why make this scheme? Politicians and bearcats are probably smarter than us, they would obviously be aware of our attachment to personal jewels, why would they draft such a thing??

Well the answer is simple. The general public is not the target of this scheme. This is for investors who already have gold in their portfolio. Gold itself would grow its worth in time, imagine depositing it in banks and earning interest on it, that’s a double income on a single asset! 

All this is fine and obvious. What are we missing? Well, tipping the rich to invest more is not the only goal here, the second leg,(which is actually the first) is that Banks would be able to allocate this gold to meet CRR and SLR requirements. Banks, need to place certain percentage of their deposits with the RBI, currently the CRR and SLR together constitute 21.5% of the deposits.  Meaning, if a bank has 100B of deposits it needs to deposit 21.5B with the RBI. The remaining 78.5B can be used for their business that is; giving loans. So, now that gold has come into the picture, Banks may keep gold in the RBI and use more cash to give away more loans and hence increasing growth in the country. 

So to summarize, what’s this scheme about? 

1.       Make big investors earn two times on a single asset.

2.       Allow banks to use the gold to meet their duties and save cash to give more loans. 

 

Will this reduce gold imports?

No

Will this make any difference to household gold?

No

Will this mean anything to small investors?

No

Do we need this scheme?

I don’t know.