Indian Gov’t Releases Draft Details Of Gold Plan
New Delhi-India (May 20) According to a draft document from the Indian government, citizens will be able to deposit a minimum of 30 grams of gold in bullion or jewelry to take advantage of the country’s new gold monetization scheme.
The details of the document were reported by Bloomberg Tuesday, which also said that banks can not only set the interest rate on deposits, but also loan out the metal to jewelers. These are the first details to be release about the government’s plan since it was launched in February, when the budget for 2015 was introduced.jewelery.jpg
In the initial launch, the new monetization scheme will be limited to a few select cities as infrastructure will have to be created to secure the gold deposits. Also, according to the draft plans, customers will have the option of redeeming their deposits in either cash or gold after a minimum of one-year. Finally, the draft also said that investors may be exempted from paying capital gains, wealth or income taxes.
The government is now looking for feedback from its citizens and they will have until June 2 to send in their comments regarding the government’s plan.
In an interview with Bloomberg, Prithviraj Kothari, vice president of the India Bullion and Jewellers Association Ltd, said the government plan could help households monetize their scrap and broken jewelry. He added that he would expect interest rates on the gold to be more than 3%.
The government’s plan is to reduce gold imports into the country by mobilizing about 22,000 tonnes of the metal that is stored as household wealth and within a variety of temples. A reduction in gold imports would help to reduce the country’s current account deficit, which ballooned in 2013, causing the rupee to hit an all-time low.
Although the plan is ambitious, it is still uncertain if it will be able to work. UBS AG analysts Edel Tully and Joni Teves said in a report published May 15 that, in anticipation of the government’s plans, a previous plan has had minimal impact in releasing hoarded gold.
They noted that a gold monetization plan was introduced in 1999, and in the last 15 years has only collected 15 tonnes of gold, “a rather disappointing number.”
A reason for the lackluster response was that the threshold was high as consumers had to deposit a minimum of 500 grams of gold to participate in the plan. However, UBS added that the lower entry point also adds its own risks.
“While a lower minimum deposit would have greater mass appeal, this would likely mean more administrative costs for banks as they would have to deal with a higher number of smaller transactions,” the bank said in its report.
Of course, the biggest hurdle to the government’s plan is changing consumers’ perception of gold. UBS said a paradigm shift would need to occur in order to access the bulk of household gold.
“Parting with one's gold is considered inauspicious by many. Additionally, depositing jewelry and getting rupees back at maturity effectively means that labor charges and/or brand premium that was imbedded in the piece of jewelry when it was first purchased may be lost,” USB said. “All of this suggests that unless there is a fundamental change in attitudes towards gold and gold jewelry, the scheme could potentially attract only a subset of gold holdings such as scrap/unusable gold and investment-type products like bars and coins.”
Although the government has targeted the gold market with import restrictions in an effort to reduce its massive current account surplus, some analysts have said that it is unnecessary. The biggest impact on the country’s import costs are from oil prices. Analysts have pointed out that the almost 50% drop in oil prices in the last 12 months has given the government more room to relax its stance on the gold market.
In November, the government ending the 80:20 rule, which said that firms had to export 20% of their gold products before they could import more; however, the country has maintained high tariffs of 10%.