The Gold Monetization Schemes (GMS) introduced by the popular prime minister of India, Narendra Modi, have been a total flop so far. The administration is now amending the terms of some of these gold monetization measures in an effort to make them more attractive to investors. China and Turkey, two more gold-obsessed countries, have attempted to implement similar measures.
However, if the Modi government believes it can convince its citizens to slow down on buying gold, it will almost certainly see this kind of wishful thinking fail. In fact, it would likely backfire by encouraging more and more "under-the-table" sales of gold on the black market.
New GMS Measures
After introducing the various GMS late last year, the Indian Finance Ministry made changes in January that allowed investors to withdraw medium-term deposits after three years and long-term deposits after five years. Of course, they would still be penalized with a reduction in accrued interest for doing so.
With the sluggish pace of gold deposits into the variety of schemes, this policy adjustment didn't go sufficiently far to entice greater investment. As a result, the government is now pursuing greater changes to the GMS. Interest that depositors gain on their medium- and long-term contributions is paid in Indian rupees (although it is calculated based on the value of the gold deposited). However, the rules were changed to allow redemption in the form of gold; the only drawback is that an administrative charge of 0.2% of the value of the gold withdrawn accompanies this kind of redemption.
This is supposed to be an improvement upon the original arrangement, but it's not hard to see why gold owners would be skeptical. Probably more attractive to potential GMS investors is the proposal that capital gains tax be exempted for gold deposits and the interest earned from them. This still remains only a proposal for next year's government budget, however.
India's Love of Gold
Estimates place the total amount of gold in private hands in India somewhere around 22,000 metric tonnes. That's many multiples of what any other central bank or organization holds. (By comparison, the largest government stockpile of over 8,000 tonnes is held by the U.S. This is more than double any other official gold holdings.)
Incredibly, the average household in India spends 8% of its daily income on gold jewelry and gold coins. This almost matches the proportion spent on healthcare and education! Last year, the country imported roughly $36 billion worth of the yellow metal.
Aside from the monetization schemes, India's gold policy likely needs to be overhauled so that some of these 22,000 tonnes are exported. Efforts to curb gold-buying have simply failed. However, if a prestigious "Made In India" jewelry refining and fabrication industry were to be developed, perhaps gold could become a more productive part of the country's economy. Moreover, this would go a long way toward standardizing the country's gold market. Better standardization would engender more trust between buyers and sellers that the gold bullion changing hands is of the proper quality.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.