India's Gold Mobilisation Plans 'Likely to Flop'
Thursday, 9/10/2015 18:46
Gold Bond scheme "needs strong interest rate", Monetisation "needs amnesty"...
The INDIAN government's gold mobilisation schemes – aimed at reducing the world No.2 consumer nation's heavy bullion imports – are likely to disappoint, according to leading analysts and financial commentators.
The cabinet of BJP prime minister Narendra Modi this week added details to the plans first announced in its spring Budget.
Besides a Gold Bond program – offering a rate of interest on annual investments up to the cash value of 500 grams or less – the government's long-awaited Gold Monetisation scheme will also invite people to put some of their existing jewelry on deposit at commercial banks.
Indian households and temples are estimated to hold perhaps 20,000 tonnes of gold in total, more than 1 ounce in every 10 ever mined in history.
With zero domestic mine output, India imported
over 915 tonnes of gold in the last financial year, up 36% from the year before.
"The gold bond scheme is a clear winner," reckons an op-ed column at
FirstPost, as it
will offer "paper backed by gold [to] absorb a major part" of India's 300-tonne per investment demand.
"But the government will find it difficult to pull off the gold monetization scheme,"
FirstPost columnist Dinesh Unnikrishnan goes on, because "not many people would want to see her long-preserved, family-inherited, emotionally attached, piece of yellow metal lose its identity and 'feel' by melting it for meagre returns."
Gold jewelry put on deposit will in fact be melted down and lent or sold to Indian jewellers for making new items, with the aim of 'mobilizing' some of the country's huge existing private stock.
"The crucial determinant of success [is] the rate of interest to be paid," says bullion analyst Tom Kendall at ICBC Standard Bank in London, but it "has yet to be determined" in the government's latest details.
With cash in the bank currently paying 8% on 1-year deposits, Kendall adds, both the Gold Bond and Gold Monetisation schemes will struggle to compete – not least because the rate paid to gold jewelry depositors must come below the rate by jewelers to borrow metal if the bank is to make a profit.
"The impact on gold demand and the wider gold market is unclear at this stage," agrees Swiss investment and bullion bank UBS – a major supplier to the Indian market – because this week's Cabinet press release did not give "enough detail to get a good sense of how exactly [the schemes] will be structured and rolled out.
What's more, writes financial columnist Shaji Vikraman at
IndianExpress, "History shows that [deposit] schemes without an amnesty on offer have hardly succeeded" – referring to financial rules introduced in the late 1990s which force Indian banking clients to declare where money or assets came from.
A gold bond scheme in 1993 "
managed to mobilise a little over 41 tonnes," Vikraman says – then equal to more than 10% of the nation's central-bank gold reserves – "because the scheme offered immunity to investors from being asked questions as to how this gold was acquired and the source of funds."
A similar program in 1999 "flopped" however, because "by then, the government couldn't offer an amnesty scheme [thanks to] strictures from the Supreme Court after the famous Voluntary Disclosure of Income Scheme (VDIS)."
"This is
not a black money immunity scheme," finance minister Arun Jaitley said of the new plans Wednesday when asked on this point, "and normal taxation laws would be applicable."
The Indian government will also start issuing gold coins in the "
early part of next month," according to economic affairs secretary Shaktikanta Das, fulfilling an announcement in this spring's Budget aimed at reducing gold coin imports.
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