Will India lose its appetite for gold jewellery?
India imported about 455 tonnes of gold between April and August 2015 and if there is no big slow down in demand, the country may import about 1,000 tonnes in the current fiscal year, about as much as the record overseas buying of 1,014 tonnes in 2012-13. Such inflows had forced the UPA government to clamp down imports in early 2013 by sharply increasing customs duties. Last year, after the government eased restrictions on the yellow metal and prices of gold softened in the international market, imports rebounded to 915 tonnes of gold, about 40 per cent more than the 662 tonnes in 2013-14 when the clamp down was in place.
On an average, about ten per cent of the gold imported into the country is re-exported, mostly in form of jewellery. About 30-40 per cent of the gold imported is held for investment and mostly, in form of coins and bars. But a bulk of the gold imported is converted into jewellery for local consumption.
It is in this context that three gold schemes - the Gold Monetisation Scheme, Sovereign Gold Bond Scheme and Gold Coin and Bullion Scheme - were launched by Prime Minister Narendra Modi on Thursday November 5. The hope is that these schemes will ultimately lower the quantum of gold that India imports and that some of the gold that is hoarded in lockers at home and banks would be brought out for recycling. The added bonus is that one of these schemes will allow individuals and institutions, including religious trusts, to earn some income on their gold holdings, making it a productive asset from being a dud investment. There is also a hope that people will gradually want to hold gold as a paper instead of its physical form.
But will Indians be lured by the three schemes? The Gold Coin and Bullion Scheme will be a runaway hit, not just for gifting but more importantly, for hoarding for possible future use. The government will be selling coins weighing five grams and 10g and small bars of 20g through designated and recognised outlets of public sector enterprise Metals and Minerals Trading Corporation of India (MMTC). The coins of 24 karat purity and 999 finesse will come in tamper-proof packaging which will have advanced anti-counterfeit features on the cover. There will be 15,000 coins of five grams, 20,000 coins of 10 grams and 3,750 bars of 20 grams on offer initially.
The Gold Coin and Bullion Scheme is expected to be moderately successful - religious trusts that hold gold jewellery, coins and bars offered by devotees are most likely to subscribe to this scheme rather than individuals. This is because gold jewellery has many emotions attached with it. It is mostly given to young women on their wedding by their parents, and in other cases, passed down through generations as family heirloom. But even if this scheme is moderately successful, it would help lower imports of gold.
For those who are not emotionally attached to their gold, the process of monetisation could prove to be painful. The scheme is not as simple as just depositing gold in a locker. To begin with, a depositor needs to offer at least 30g of raw gold - coins, bars and jewellery excluding stones and other metals. The process of monetisation involves taking the gold to a collection and purity-testing centre certified by the Bureau of Indian Standards (BIS) for testing its purity and getting it melted. Once the gold is melted and converted into a bar in the customer's presence, s/he has the option to take the bar or opt to deposit the gold at the collection centre and take a certificate for the deposited gold. This certificate can then be used to open a gold savings account with a bank.
The gold deposit savings account can have varying tenure - short term (one-three years), medium term (five-seven years) or long term (12-15 years). Premature withdrawal from these accounts will be allowed subject to minimum lock-in period and penalty for the short-term deposits. The interest rate for short-term deposits will be determined by the banks, while the government has announced an interest rate of 2.25 per cent for medium-term deposits and 2.5 per cent for the long-term one made in 2015-16. On maturity, the depositor in the short-term scheme has the option of the taking the proceeds in the form of physical gold bars.
It is, however, the Sovereign Gold Bond Scheme that can actually dissuade residents from buying physical gold, as it gives investors the same benefit of investing in physical gold. The returns too will be linked to the price of physical gold, making it for good accumulation. Each bond will be worth one gram of gold and investors are required to buy a minimum of two bonds. There is a ceiling on maximum investment too - 500g per person per fiscal year. These bonds will be issued for a period of eight years by the Reserve Bank of India (RBI) and it can be traded on stock exchanges like most government bonds. Investors will have the option to exit beginning from the fifth year of investing. The bonds have been priced at Rs 2,684 per unit and will carry interest rate of 2.75 per cent.
While the gold bond will appeal to a wide cross-section of people who consider gold as one of asset classes they should invest in, it will not substitute jewellery at weddings. And, so the appeal of gold jewellery will continue into the future in India. But, the three schemes are well-intended and may reduce India’s gold import in the long term.