Gold Monetisation Scheme

Issues with high gold demand

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Gold monetisation scheme

Mains level : Paper 3- Gold demand in India

Context

Gold’s appeal as a safe haven is only rising: as tensions escalate in Ukraine, its price is approaching records.

Factors explaining demand for gold in India

  • India is the world’s second-largest market for the yellow metal, behind China, though it produces almost none at home.
  • This is partly driven by tradition.
  • Brides are given jewellery as part of their dowry and it is deemed auspicious to buy bullion around certain religious festivals.
  • It is a handy store of undeclared wealth, too, often stashed in wardrobes or under the mattress.
  • But the pandemic has also affirmed an investment advice passed on over generations: park savings in gold as a rainy-day fund.

Concerns with such a high demand

  • Vast gold imports can destabilise the economy.
  • During the 2013 “taper tantrum”, when India’s foreign-exchange reserves were lower than they are now, a rush of gold imports helped push the current-account deficit to 4.8% of GDP and fuelled worries of a currency crisis.
  • Savings stashed away as idle gold could be put to more productive use elsewhere. 
  • Indian households hold 22,500 tonnes of the physical metal—five times the stock in America’s bullion depository .

Policy measures by the government

  • Import duties hover around 10%, even after cuts in last year’s budget aimed at keeping smuggling in check.
  • The central bank has ramped up issuance of sovereign gold bonds, which are denominated in grams of gold.
  • Of the 86 tonnes’ worth issued since 2015, about 60% were sold after the pandemic began.
  • And the gold monetisation scheme, which allows households to hand gold over to a bank and earn interest, was revamped last year to reduce limits on the size of deposits.
  • Lockdowns inadvertently helped the state’s agenda.
  • Mobile payments platforms like PhonePe and Google Pay reported rising appetite for digital gold, which is sold online and stored by the seller.
  • Money also rushed into gold exchange-traded funds (ETFs).
  • Their assets hit 184bn rupees ($2.5bn) in December, a 30% rise in a year.

Conclusion

Still, only a sliver of the population, mostly well-off urban types and millennials, invest in complex financial products. A large part of India’s demand for physical gold comes from rural areas, where it seems in no danger of losing its lustre.

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