Gold monetization scheme - pros and cons

Gold monetization scheme – pros and cons

Introduction:

Ever since the budget was passed, it was anticipated that gold monetization scheme would be a new milestone in the development policies of the then newly elected government. There were assumptions in favor and against the credibility of the scheme which is mainly about depositing gold in banks and earning good interest on it instead of keeping it in lockers for an eternity of passed on gifts through generations. We Indians are known for our traditions and indulging in lavish jewelries. Marriages for us is more of a display of how much gold one owns. Amid all these age old indulgence in gold flaunting, will a scheme like this find its place? Will we Indians find it in our hearts to use gold as an asset instead of decking ourselves with it as a symbol of grandeur? Let’s consider the pros and cons of this scheme to understand if it could lure people more than exhibiting.

Pros:

1. Gold remains dead asset in Indian families. Even when the family is in need of money, they despise selling off gold jewelries owing to traditional beliefs and hopes of prices hiking so high one fine day that it would pay them much more than present day. Now that gold could be deposited and the depositor could earn lucrative interest on it, more and more people would want to take benefit of this plan and it would certainly work off well.

2. Every year India imports around 1000 tons of gold even though studies have it that more than 22,000 tons of gold is in stock of Indian citizens. These gold are neither monetized and nor are they used to fulfil the requirements of families at times of crisis. Selling off gold jewelries is considered the last option and then when the family is in urgent need, they sell the gold at lower prices, not to forget the deductions. This problem would be solved if more and more people join the scheme.

3. Our domestic gold market would benefit largely from this scheme. There would be no shortage of gold metals and jewelers would not have to consider importing gold. This could go ahead to fall in demand and could help in lowering the price of gold in domestic market. Foreign exchange reserves and lowering value of Rupee could be kept in check.

4. On maturity, people can get their gold back or equivalent amount of the same at prevailing rate of gold at that time. This would only make gold a better security for those who are sensible enough to see beyond pieces of jewelry in the yellow metal. You get likely exempt from Wealth Tax, capital gains tax, and income tax on the interest received on the deposited gold.

5. Purity of gold is questioned when we buy from local jewelers and after a few years if we go to the same jeweler to sell the same piece of jewelry that we purchased from them, at least 10% is deducted from the current rate.

6. Designs of jewelries change. Not everyone keeps wearing the age old jewelries passed on to them from generations. If trends are to be taken into account, everyone who owns gold jewelries go for an exchange which comes with a huge loss, despite the hike in price.

Cons:

1. Gold coins and bars would not be as appeasing to average Indian families as jewelries made of gold are. For those who want to invest in gold monetization, buying gold coins seems to be the only money-spinning option. Where would all these gold coins come from if people are not willing to give away their gold jewelries in exchange for virtual gold? Yes, there are provisions for gold jewelries but for the scheme to be successful, gold coins seem to be the only lucrative course.

2. Getting all the idle lying gold to be converted into gold coins to be deposited would incur making charges of the jewelry that usually is a good share of the total price. The reason why so many people indulge in buying gold jewelries during Diwali (apart from the traditions) is the lower making charges offered by jewelers. People of every other community and religion prefer buying gold during this festival which makes it clear that we would not be willing to do away with the heavy making charges that gold involved during the buying and now converting procedure.

3. Average Indian households are said to have more inherited and purchased gold than bank savings. Gold is an asset too for these people owing to the fact that there is no taxation on how much gold a person has stocked in his lockers. Nothing as of now has been said about taxation on this gold monetized or deposited in banks. There definitely will be taxable limits which would not interest many and for the scheme to be successful, gold has to be lured out from being dead assets. This is not going to be an easy task.

4. Involvement of income tax offices that would want to know the source if a person pledges too much of gold in banks is not a pleasant thought for many and they may not want to risk getting revealed. While this scheme could appeal to businesses, temples, trusts, banks, organizations, households might not be cooperative in this and since this scheme is intended to bring out dead assets lying idle in households, the mission might not be accomplished.

5. Jewelries would have to be melted to check purity of gold at certifies testing centres or Hallmark centres. If one is not satisfied with the result, they can take home the melted gold. People would usually have no idea about the purity of gold that has been passed on to them from their ancestors and melting the same to be disappointed later is something that will get many worried.

Conclusion:

Gold monetization scheme is the need of the hour for India. Given that we have surpassed China in gold import per year, it would only be wise for people to take advantage of this scheme and monetize their idle lying gold. For those who are buying gold as asset that would hike prices, this scheme is definitely a winner. For those who buy gold in advance for marriages of their daughters, this scheme is just what they could ask for. It is about time we come out of our age old thinking and make use of the schemes that the government is implementing for a good reason.