Will the draft Gold Monetisation Scheme deliver?
New Delhi-India (Jun 18) In what is, from all accounts, a clear and emphatic demonstration of the sagacity of Finance Minister Arun Jaitley, the finance ministry while notifying a draft of the Gold Monetisation Scheme for public comment, chose not to notify the other Sovereign Gold Bond Scheme. In my opinion piece on April 17, 2015, I had argued that such a scheme would not deliver in practice and could even potentially make the fisc/exchequer take a hit of trillions of rupees and might thus end up being fiscally overwhelming and way too disruptive. I brought out the fiscal risk to the exchequer of monumental proportions which, paradoxically, would be directly proportional to the extent of success of sovereign gold bond scheme, if short gold exposure is not hedged, and no reduction in gold imports, if it is hedged.
A dissection of the draft Gold Monetisation Scheme recently notified by the Finance Ministry is required. Specifically, the draft Scheme delineates utilisation of gold deposits mobilised by banks for 1) buying foreign currency to lend to exporters/importers; 2) trading on commodity exchanges; 3) making gold coins and selling to banks' customers; 4) lending gold to jewellers; and 5) meeting part of banks' cash reserve ratio.