Economy - MAHAMAG Magazine beyond boundaries

MONITIZING GOLD - Burny Peter

Clever ads of some Kerala based gold loan companies had been exhorting Indian audience to monetize their gold instruments, especially ornaments, by pawning; and pursue their dreams. It has been an attempt to change the approach to gold that an average Indian holds. In our culture, gold has been a utility for ostentatious purpose – to flaunt your status and wealth. Indian families’ traditional urge to hoard up gold is continuing to current days, almost unabatedly. In this circumstance, the recent schemes introduced by Central Government top prompt people to monetize their hoarded up gold, through various financial institutions, by providing them with interest, is a revolutionary step. The immediate instigation for this step was the rise in current account deficit of India. Gold comes second among imports, after oil, which eat up our foreign currency reserves. It was the realization that current account deficit must be reduced to attain the goal of a healthy and self sufficient economy that prompted the devising of schemes of these kinds of nature.
As it is evident for any perspective observer, Indians tend to amass gold in their lockers, whenever their income exceeds sustenance levels. Other instruments like equities, debentures or investments like bank accounts or mutual funds were not successful in replacing this tendency, despite aggressive campaigns. The harm of this cultural tendency accentuates due to the fact that lion share of India’s gold needs is imported. The foreign currency corpus that Indian traders have to dispense with to satisfy this demand is enormous. The ephemeral tendency of viewing gold as a safer investment by professional investors does not harm economy that much, but temporarily. But, the propensity of the average Indian to hoard up gold, definitely hurt. As declared by government, its aim is to utilize the gold reserves lying useless in Indian familial custody, for reducing the dependence on gold imports by traders to cater this demand. If government’s plans get right, this move is definitely going to help in the purpose of reducing current account deficit. Government is planning to make people treat gold as an investment proposition by offering attractive returns and also providing them some leeway to make profit by introducing the concept of ‘Gold Bonds.’ As it is evident for any perspective observer, Indians tend to amass gold in their lockers, whenever their income exceeds sustenance levels. Other instruments

like equities, debentures or investments like bank accounts or mutual funds were not successful in replacing this tendency, despite aggressive campaigns. The harm of this cultural tendency accentuates due to the fact that lion share of India’s gold needs is imported. The foreign currency corpus that Indian traders have to dispense with to satisfy this demand is enormous. The ephemeral tendency of viewing gold as a safer investment by professional investors does not harm economy that much, but temporarily. But, the propensity of the average Indian to hoard up gold, definitely hurt. As declared by government, its aim is to utilize the gold reserves lying useless in Indian familial custody, for reducing the dependence on gold imports by traders to cater this demand. If government’s plans get right, this move is definitely going to help in the purpose of reducing current account deficit. Government is planning to make people treat gold as an investment proposition by offering attractive returns and also providing them some leeway to make profit by introducing the concept of ‘Gold Bonds.’

The new endeavor to be initiated by government is a double pronged strategy. One scheme is the ‘Gold Deposit Scheme”, which enables common man to deposit their unused gold and earn interest. They can do so for short term, mid-term and long term. The depositor can decide whether they want return in money or gold. The second scheme is for government to issue “Gold Bonds”. People can own them and also sell and buy in debt market like other bonds. When the period expires, the amount equal to gold price at that juncture will be provided. In the case of this scheme, there is a probability that government may incur losses, if the gold price increases to a large extent in future. To cover this risk, government will form a corpus formed by the amount equal to the two percent variation to lower side in the interest for gold bond, to that given to government bonds. The range of increase in gold price will be made up by the money available in this corpus.