The Ministry of Finance (MoF) on May 19, 2015 has come out with the draft Gold Monetisation Scheme through e-portal to allow for public suggestion and comments, before the scheme is finalized.
The scheme aims at mobilizing domestic holding of gold to provide more self-sustenance to the Indian Gems & Jewellery (G&J) industry. The Indian G&J industry plays an important role in the Indian economy, as it contributes in large-scale employment generation, foreign exchange earnings through export and value addition in terms of both aesthetics as well as investments. Indian G&J industry is dominated by gold which accounts for almost 80% of the total jewellery demand in the country, while investment demands are entirely based on gold.
Globally, India is one of the largest consumers of gold, accounting for a round 26% of the total demand for gold in the world in 2014. The total consumer demand for gold in India in 2014 stood at whopping ~843 tonnes as against the world’s total consumer demand of ~3,217 tonnes, making her the largest demand center in the world surpassing China.
Gold also forms India's one of the largest imports, second only to petroleum. Since the domestic production of gold in negligible, India has to primarily depend on imports for its gold requirements leading to a heavy foreign currency outflow from the country. In FY13, India’s current account deficit (CAD) increased to USD 87.8 billion, constituting around 4.7% of the GDP, forcing Government of India and Reserve Bank of India (RBI) to introduce a slew of measures in FY14 like 80/20 rule, restriction on lease based gold procurement, etc. (most of which have been withdrawn subsequently in FY 2015) to curb the domestic consumption of gold.To avoid similar situation in the near future, the Government of India announced its intention to introduce a Gold Monetisation Scheme in the Annual Budget 2015, to channelize the 20,000 tonnes of domestic holding of gold in the country.
While the proposed gold monetisation scheme (2015) has been initiated for reducing India's CAD through utilization of idle gold reserve but operational clarity is the key to the success of the scheme, says CARE Ratings Research.
Educating the consumers over the presence and benefits of scheme shall be crucial (especially for the rural population), along with offering them attractive interest rates to part away with their gold holdings, it said.
The interest rate on the proposed GMS scheme as determined by the banks will ultimately impact the cost of financing for the G&J players. While, it is expected to be majorly beneficial for G&J players using fund-based bank limits for gold procurement, the impact on players using GML are to be seen.
Post further clarity as regards to the working of the scheme, CARE Ratings expects the scheme to take reasonable amount of time to gain popularity among the consumers for active participation in the scheme.
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