Moneycontrol
May 17, 2017 08:03 PM IST | Source: Moneycontrol.com

3 years of Modi govt: Why gold schemes have failed to glitter

To be fair there is nothing wrong with the idea of seeking gold hoarded at homes or in bank lockers to be brought into the economy. It was an innovative idea which the government dared to test. Being the second largest buyers of gold, which accounts for more than 25 percent of India’s trade deficit, Indians have persisted in investing in an unproductive asset.

3 years of Modi govt: Why gold schemes have failed to glitter

Shishir Asthana

Moneycontrol Research

One area where this government doesn’t seem to want to learn from its mistakes is gold schemes. Its fixation with launching these schemes despite repeated failures makes one wonder if it is pride that stands in the way of accepting that these have been duds.

To be fair there is nothing wrong with the idea of seeking gold hoarded at homes or in bank lockers to be brought into the economy. It was an innovative idea which the government dared to test. Being the second largest buyers of gold, which accounts for more than 25 percent of India’s trade deficit, Indians have persisted in investing in an unproductive asset.

The government had intended to attack the problem from two directions. First was to bring out the 24,000 tonnes of gold that the World Gold Council says is with individuals and temples. Second was to convert the gold bugs to buying gold bond rather than physical gold. In order to entice them, the government incentivized the product by introducing an interest component.

But when it comes to gold, especially for Indians, the sentiment attached to physical gold is far greater than any interest that government wants to pay.

This is one of the reasons that has limited public participation in Narendra Modi’s Gold Monetisation Scheme and Gold Bond Scheme. The government has launched seven tranches of the Gold Bond Scheme and has kept its Gold Monetisation Scheme open but could manage only limited success.

Two surveys on the subject point to the problem with the schemes.

Let’s first look at the Gold Bond Scheme. A study conducted by researchers of Institute for Financial Management and Research (IFMR) and funded by India Gold Policy Centre (IGPC) of the Indian Institute of Management Ahmedabad (IIM-A) covered 1,000 respondents across four reasonably prosperous districts.

What is alarming is that only five out of the 1,000 respondents were aware of the various government schemes on gold. This clearly reflects the failure on the part of the government in marketing its scheme. It is nearly two years since the scheme was launched and the message has not yet percolated down to the common man. Apart from the initial blitzkrieg during the launch phase, the government has not proactively pushed the scheme.

A tepid response might be the reason for government going slow on the scheme. Banks too have not been pushing the scheme the study finds out.

However, the fact is that the product itself is faulty. Gold bond buyers do not enjoy the liquidity that a physical gold buyer does. There is a lock-in period for gold bonds of eight years. On the other hand, someone buying physical gold does not have to follow any such restrictions.

Though selling in exchanges is allowed, there is no secondary market for gold bonds. Finally a gold bond buyer exposes himself to scrutiny, while there is still room for anonymity for physical gold buyers. Unless these issues are addressed the gold bonds are unlikely to pick up.

As for the Gold Monetisation Scheme, the government’s response in the parliament was that 6.41 tonnes of gold has been deposited with the banks. The amount is negligible considering the nearly 600 tonnes of gold import in India and 24,000 tonnes that is with households and temples.

A survey partly financed by India’s Citizen Environment & Consumer Economy (ICE 360° survey) was conducted on 61,000 households as reported in LiveMint. The survey found out that nearly two-thirds of the households surveyed did not prefer to deposit their gold holdings with banks and roughly the similar size found that the interest rate of 2-3 percent given by the government was not enough.

It was also found that the three main motivations that drive people to hold gold are security (or capital conservation), scope of capital gains, and liquidity, in that order of importance.

A big part for the poor response was that nearly 75 percent of all gold stored in household is in the form of jewellery which has a sentimental value attached to it. Giving it away to the government, who would melt it and sell it to jewelers is something that does not appeal to Indians. They prefer to pledge the jewellery which ensures that it will be returned in the same condition when the loan is repaid.

Further, depositing the gold with the government would reveal the wealth stored in the family and thus expose the household to future scrutiny.

While government’s intention was good, it did not gauge the sentiments and the importance of anonymity involved in dealing with gold. But having launched with much fanfare, it is now a hard call for the government to say that its project has failed.

Full coverage: Three years of Modi government
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