Revised gold bond scheme lacks breadth, but it can still succeed

Shishir AsthanaMoneycontrol Research

The government of India has been trying to appeal to the population’s love for gold by repeatedly launching various schemes. Given the amount that has been collected, it is safe to say that its effort has not been really successful.

The government has launched two schemes for gold bugs in the country. One was the gold monetisation scheme, where gold that was kept in households and trusts could be deposited with the government and earn a little interest. The second scheme is the gold bond scheme where a buyer can opt for buying gold in dematerialised form rather than in physical form.

Despite the obvious gains, both the schemes have not really taken off. Take the case of 2016-17 where the government budgeted Rs 10,000 crore from the schemes but could garner only Rs 3,809 crore. In 2015-16, it could collect only Rs 1,318 crore. Among the two schemes, the gold bond scheme has been relatively more successful.

Not to be discouraged, the government is trying to revive its bond scheme. The major change that has been brought in is — the buying limit has been increased. In any fiscal year, the gold investment limit has been increased to 4 kg for individuals, 4 kg for Hindu Undivided Families (HUFs) and 20 kg for trusts and similar entities notified by the government.

Further, flexibility has been given to finance ministry to design and introduce variants of bonds with different interest rates and risk protection/payoffs that would offer investment alternatives to a different category of investors.

Is this policy a game changer which can prompt gold bugs to rush to the banks to buy demat gold?

The answer lies in the pattern of consumption of gold in India. As per a World Gold Council report, gold buyers are present across the country but mostly reside in Kerala. Rural population in Kerala buys gold over 10 times the average of other states, while urban Kerala population buys nearly 8 times more than the average of other states.

But the richest five percent in the country spend over 20 times than the average of the remaining 95 percent. It is these buyers that could have felt the 500 gram limit of buying gold in a year as restrictive. With demonetisation, strict implementation of Aadhaar and linking of Aadhaar to income tax returns, the government now has a trail of the buyers, thus the question of buying gold to hide black money does not really arise.

A recent survey conducted by an independent not-for-profit organization, People Research, on India’s Consumer Economy points out that unlike popular belief that gold is bought mainly for weddings, most buyers do it for ‘other social purpose’, which includes saving. Nearly half the people surveyed said that they would invest more in gold if they had the money.

The strong appetite for gold is what is making the government try out various options to make it available to the common people. ‘Electronic gold’ offers big advantages over physical gold as it eliminates transaction charges or ‘making charges’, and the question of purity of gold is also taken care of, but there are other issues that restrict its popularity. The lure of holding a gold coin or gold bar in your hand as against having it show in your bank statement is preventing its use in the rural area.

Further, the points of sale, which presently are the banks, post offices, and stock exchanges, need to be widened. People’s interaction with gold on a commercial basis is when they enter a jeweler's shop or a gold loan financier. These entities need to be made points of sale with enough incentives to promote their use. More importantly, these entities should be encouraged to use gold bond certificates for lending.

While the government has addressed the issue of making the gold bond scheme appeal to the high-value consumer, it offers little for the masses, especially in semi-urban and rural India. Since the government has conceded that it is difficult for Indians to be kept away from gold, as it is still considered as holding value for money and as an insurance for bad times, it would help in focusing on distribution to make it popular.