All that glitters is not Gold: How will gold monetization help India?

The much-hyped Gold schemes by the government of India are in with Prime Minister Narendra Modi launching three Gold schemes on Thursday with the aim of making India rich! Certainly, the schemes have been designed with a vision and a practacility that highlights the best possible way India could avoid loaning/importing Gold from outside.

Interestingly, world ranking in the world in terms of economy and development is not that bad. It stands in third position after China and the United States.

While it has earned the famed position after toppling Japan, it is yet to cover a huge gap to reach the level of its top two competitors. According to CIA fact files, China has registered a GDP of 18,088,054 INT$, USA 17,348,075 INT$ and India 7,411,093 INT$.

Import of Gold, gems, precious stones coins worth form a major part of the imports to India from foreign lands. According to 2014 reports, India imported close to 60 billion (about 13% of the total import of US$462.9 billion). In fact, this year India has surpassed China as a major consumer of Gold, buying 562 tonnes of Gold visa vie china's 548 tonnes.

[Read: PM launches gold schemes; coin with Ashok Chakra, Gandhi image]

Currently, India imports around 1,000 tonnes of Gold, leading to massive outflow of forex reserves.

So, how would the Gold monetization program help India?

As modi pointed out, the three gold schemes have been put in place to lure tonnes of idle gold from the houshold into the banking system, which can be lent further to jewellers, thus reducing the import levels.

While India benefits, the schemes will enable people to earn interest of up to 2.5 per cent; while under the Sovereign Gold Bonds Scheme, investors can earn an interest rate of 2.75 per cent per annum by buying paper bonds.

[Read: PM Narendra Modi to launch 'India gold coin', other schemes on Nov 5]

Banks will be collecting the Gold for upto 15 years and will auction them off to jewellers from time to time in return for an interest of 2.25-2.50 percent interest a year. Furthermore, the recycled Gold will have no import tax, which accounts to 10% of the total cost, hence being lighter on the pockets of the consumers.

Return on invstment for banks

This would be helpful for those banks that see no return on investment. They can now sell the gold and raise foreign currency that can be used in exports, imports, can be converted to coins or be used for cash reserve ratio and statutory liquidity ratio requirements.

Experts believe that the progress would be slow, but even if there is a 1% success rate, the import bill will go down by 10 to 20 percent, says Nomura statistics.

[Read: Gold at 5-year-low on stronger dollar]

Margin of error

While the program seems practical, the government needs to adhre to the emotional side too. Most of the Gold in Indian households are owned by women as souvenir from their parents or grandparents that attack a lot of values. Quite likely, they will hesitate in giving it away that too for an interest rate, which is lower than financial investments that could go up to 8%.

[Read: What Is Gold Monetisation Scheme (GMS), 2015?]

Seconfly, customers will be sceptical of the Income Tax departments haranguing them over the custody of Gold. In such a case, Government should specify the amount that can be pledged without the harassment of the income tax department. Furthermore, tax payable on conversion of the physical gold into the gold deposit scheme would hold back customers from pledging their gold.

In such a case, experts say that the tax should be levied only when the Gold is sold and not when it is monetised.

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