stocks of gold in India were estimated to be over 20,000 tonnes but

mostly this gold was neither traded, nor monetised.

Gold Monetisation Scheme, which would replace both the present
Gold Deposit and Gold Metal Loan Schemes.
would allow the depositors of gold to earn interest in their metal
accounts and the jewellers to obtain loans in their metal account.
Banks/ other dealers would also be able to monetise this gold. The
deposited gold will be lent by banks to jewellers at an interest rate
little higher than the interest paid to customer.
Both principal and interest to be paid to the depositors of gold, will
be valued in gold. For example if a customer deposits 100 gm of
gold and gets one per cent interest, then, on maturity he has a
credit of 101 gram. The interest rate is decided by the banks
concerned.
To offer higher rates of interest (2.25-2.5%) than existing
schemes(upto1)
The tenure of gold deposits is likely to be for a minimum of one year.
The minimum quantity of deposits is pegged at 30 gram to
encourage even small deposits. The gold can be in any form, bullion
or jewellery.
Customer will have the choice to take cash or gold on redemption,
but the preference has to be stated at the time of deposit.
interest earned on it would be exempt from income tax as well as
capital gains tax. (need to amend IT act)
There are also plans of using gold deposits for CLR/SLR to incentivize
banks but not fruitful (The Cash Reserve Ratio (CRR) is the portion
of the total deposits, which has to be kept with RBI in cash, while
Statutory Liquidity Ratio (SLR) is the portion of deposit compulsorily
parked in government securities. CRR is 4 per cent while SLR is 21.5
per cent.)- if mobilised gold is considered for meeting the CRR and
SLR requirements, then banks would have additional cash for
lending purposes.

Good:

Bad:

Good interest rate-incentive

If banks can use for CLR/SLR-good-more lending
mobilise part of the idle gold stock lying in the households and
institutions in the country
even small amt can be used as cap has been brought down to 30
grams in the proposed GMS as compared with 500 grams under the
existing gold deposit scheme to target HNIs and households rather
than temples and trusts

Use of imported gold for deposit if its attractive-defeats the

purpose of scheme.
The chances of GMS becoming a big success are still doubtful
considering the approach of Indian consumers towards gold.
Most Indians look at gold linked to tradition and customs, rather
than as a mere investment asset. Parting with their gold ornaments,
even the idle ones, is a last resort for her. It would be unwise to
expect households to actively participate in any schemes that
involve melting the long-preserved jewellery. The past record of
the gold deposit schemes that have so far received lukewarm
response is a proof for this. A differential rate of interest can be
offered on melted and non-melted gold.
Indians see gold not as a mere investment but more as a symbol of
their status.
Similarly, it will be difficult to convince temple trusts to part with
their gold treasures since the gold lying in temple vaults are linked
to faith and religion.
Dealing with the ownership of the gold is a rather tricky part. It is
unlikely that any household, where gold is a family-inherited
property, can produce any documents that prove their
ownership.can give an easy route to unaccounted gold-holders to
earn legitimate income on smuggled gold. The government can
partly address the problem to a certain extent by making invoices
mandatory only for gold brought in the form of bars or coins and not
necessarily for household ornaments. proposed GMS does not have
any strong provisions to verify the ownership of gold beyond
seeking KYC of the depositor.
individuals would be worried that if they pledge a significant amount
of gold with banks, the income-tax department may want to know
the source of that gold. tax department might also want to know if
you have paid wealth tax on the gold in the previous years. Though
wealth tax has now been abolished, even inherited jewellery was
liable to wealth tax till the previous financial year.government
should clarify the amount that can be pledged without income-tax
scrutiny and possible harassment.
Another major challenge for the government will be to check the
possible flow of black money into the financial system through this
scheme. Those, who have unaccounted wealth stored in the form of
gold ornaments and bars, will find this as an excellent opportunity to
legitimise their ill-gotten wealth. Also, they can split the gold into
tiny instalments and approach banks either by themselves or a
benami to escape filters.
Less liquidity for banks to sell gold>need gold specific customers
unlike cash

an alternate financial asset, a Sovereign Gold Bond, as an

alternative to purchasing metal gold. The bonds would carry a fixed
rate of interest, and also be redeemable in terms of the face value of
the gold, at the time of redemption by the holder of the bond.
if a person wants to buy Rs 1,00,000 of gold, he goes to a bank and
gets a piece of paper acknowledging the bank/government owes him
37 grams of gold; an interest is paid on this and, at the time of
maturity, the individual gets back the gold (plus the interest that
accrues of this) either in physical form or as cash.
aims to discourage sale of gold in physical form would issued in two,
five and 10 grams of gold or other denominations and the tenor of
the bond could be for a minimum of five to seven years. The scheme
will have an annual cap of 500 gram per person and the interest rate
will be decided from time to time on the basis of market rates.
On maturity, the redemption will be in rupee amount only.
Government shall commence work on developing an Indian Gold
Coin, which will carry the Ashok Chakra on its face. Such an Indian
Gold Coin would help reduce the demand for coins minted outside
Indian, and also help to recycle the gold available in the country.
All these to curb imports of gold by reducing its demand in physical
form and instead channelising it into the formal financial sector.
imports led to the current account deficit ballooning to 4.7 per cent
of the GDP in FY13.