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Stephen Rego

He has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites

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BW Businessworld

Modifications To Gold Schemes Will Make Them More Effective

The government has moved quickly to review the reasons for the initial ‘slow response’ to the Gold Monetisation Scheme and announced modifications that will certainly make it more effective. Continuous monitoring and improvements will help ensure that the aims of making a dent in imports will be met

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On November 5, the government launched the Gold Bonds and Gold Monetisation schemes that had been promised in the Budget. Sale of the first tranche of bonds concluded on November 20.

Last Friday, an official status update issued by the Department of Economic Affairs in the Ministry of Finance, revealed that “there has been a mixed response to these schemes from the public”. While the response to the Bonds scheme was “overwhelming”, that to the Monetisation scheme was “slow”, the statement said.

What does this translate into in terms of actual numbers? The first tranche of Gold Bonds received 63,000 applications for 917 kg of gold and garnered an amount of Rs 246.20 crore. No figures were released for the monetisation scheme, but it is widely believed to have yielded about 400 gms of gold.

It is still early days yet; much too early classify the schemes as a ‘success’ or ‘failure’.

For one, a few weeks is too short a time to properly evaluate schemes that seek to bring about a change in the Indian mindset over gold. The strong cultural affinity to gold has led to an accumulation of about 20,000 tonnes of yellow metal in the hands of private owners (households and trusts) over time. Moreover, there are no realistic benchmarks on which such an assessment can be based.

Nevertheless, given the size of the country, the amount of gold that is being regularly exchanged at money lenders or finance companies, the volume of money being invested in financial markets and taking into account other such parameters, it seems clear that more needs to be done to win over consumers, particularly in the case of monetising their gold assets.

The government’s recent modifications seem to be correctly focused on the two major areas of concern – inadequate infrastructure and the absence of an element of trust.

The number of notified Collection and Purity Testing Centres (CPTCs) across the country at the time of the launch stood at 33 and the number of refineries at five. According to the government update, “this had resulted into signing of limited number of tripartite agreements among banks, CPTCs and refiners.”

While the number of CPTCs will rise to 55 and changes in licencing norms will see the number of refineries rise to 20 by the end of the year, the infrastructure to operate the scheme will still be limited given the size of the country.

Some other positive streamlining has also been announced – for eg, depositors can deal directly with refiners after approval from the banks, and fees on account of testing, transport, refining and storage services will be reimbursed based on the actuals. Clarifications on the tax implications (exemptions on Income Tax and Capital Gains Tax are available to depositors) will provide additional incentives.

Besides this, the fact that consumers have never interacted directly with the testing centres and refineries in the past, and will be hesitant to do so in the immediate future given that there are no established brand names in the field appears to have been accepted.

This crucial aspect has been addressed by the BIS inviting EOI applications from the more than 13,000 licensed jewellers to act as a CPTC in the scheme provided they have tie-up with BIS’s licensed refiners.

Once jewellers are notified as CPTCs it will be far easier for an individual to bring in gold for testing. Moreover, consumers have dealt with these jewellers before, in some cases for many generations, and will be less hesitant to deposit their gold for testing.

One aspect of the Gold Bonds scheme that should not be overlooked in the light of the good response it has evoked is related to the mechanism for fixing prices. During the first tranche, the price of the bonds was set at Rs 2,684 per gm; yet within days of the launch the retail price of the metal fell to about Rs 2,510 per gm, possibly discouraging some. Given the volatility that the gold market has seen in recent years, and the price sensitivity among consumers, there is a need to fine tune the price-fixing mechanism.

The government has said that more tranches of Gold Bonds will be floated before the end of this financial year and it is expecting that this “new and innovative saving instrument....will continue to receive such enthusiastic response”.

Moreover, the government has announced its intent to continuously monitor and review the progress of the schemes at “regular intervals and make necessary improvements, in order to increase the reach of the schemes.....based on the feedback received”.

This will be crucial to ensure that the schemes achieve their aim of making a dent in the approximately 1,000 tonnes of yellow metal imported annually into India.