India's Golden Future

For at least a decade, we have been grappling with ideas on how to bring India's most significant saving window into the monetary economy. There have been various schemes to tap this resource in the past, most of which met with only modest success. However, these past experiments have yielded considerable valuable information which could help ensure that the current scheme is designed to successfully ensure an ongoing flow of savings out of gold and into monetary assets, with a concomitant reduction in gold demand. There is considerable evidence from other developing countries that gold demand rises with GDP per capita to a point, after which it declines, suggesting that as people get richer, they get more financially sophisticated and tend to move their savings into higher-return investments like stocks and bonds. India has not yet reached that turning point (on the GDP scale), which may explain the relative lack of success of those schemes. The steady increase of GDP over the past decade that has accompanied the continuing liberalisation of our economy and the development of our f1nancial markets suggests that we may now have arrived at the perfect time.

With a view to mobilising gold lying idle with the public and putting it to productive use, the government of India announced the introduction of a Gold Deposit Scheme (GDS) in the budget for the year 1999-2000. These regulations now permit commercial banks to solicit gold deposits from the public to reduce imports and increase the effective use of savings in the country. The Reserve Bank of India has formulated the guidelines for the scheme in order to allow banks dealing in gold to prepare their own individualised GDS.

The Gold Deposit Scheme in Practise

Instrument - Banks may issue either a passbook/statement of account or a certificate/bond to depositors for their gold deposits, which will be transferable by endorsement and delivery.

Acceptance of Deposits - Gold (bars, coins, jewellery etc.) will be accepted in scrap form only. There will be a preliminary assay to ascertain the gold content/caratage of jewellery firstly by a non-destructive technique such as x-ray/carameter, and secondly by a fool proof method like fire assay. Depending on the results of the preliminary assay, the depositor may be given the option to withdraw the tender at that point. If the option to withdraw is exercised, banks may consider levying a nominal charge to defray the cost of the preliminary assay. Banks may either enter into arrangements with an existing assayer or use the assaying infrastructure being jointly set up by the designated banks.

Entities eligible to subscribe - Resident Indian s (individuals, HUF, trusts, companies) may invest in the scheme. Jo int tenders may be accepted and more than one certificate may be issued in the case of joint holders.

Deployment of mobilised gold - Banks may deploy gold mobilised under the scheme as follows:

1. Gold loans to the domestic jewellery industry
2. Gold loans to jewellery exporters
3. Outright sales of gold domestically
4. Sales of gold to other nominated banks.

Reserve requirements - Nominated banks will be exempted from maintaining credit Reserve Ratios (C RRs) on liabilities under gold deposits mobilised in India. However, in view of multiple prescription s, banks must maintain a minimum CRR of 3% on total net demand and time liabilities (including zero CRR liabilities). As there is a uniform prescription of 25% on the total net demand and time liabilities, which is the statutory minimum, the nominated banks have to maintain an SLR of 25% on liabilities under the gold deposit scheme.

Tax exemptions –

1. Exemption of interest earned on gold deposit bonds from Income Tax.
2. Exemption of value of assets deposited in the scheme from Wealth Tax.
3. Exemption from capital gains made on the bonds through trading or at redemption from capital gains tax.