<div><em> In India, buying gold is a centuries old tradition, and even when jewellery is mostly seen as a store of value, rather than an adornment. Longer term success of the GBS and GMS depends a lot on how effectively the government can manage to change this thinking, writes <strong>Stephen Rego</strong> </em><br><br>The government is moving fast to operationalise the Gold Bonds (GBS) and Gold Monetisation (GMS) Schemes that were approved by the Cabinet on September 9. Having announced the broad parameters under which they will function, now all that remains is for the RBI to fix interest rates and the ministry to issue appropriate notifications. </div><div> </div><div>Designed to reduce gold imports into the country, the twin schemes are the latest attempt to strike a balance between reining in the Current Account Deficit (CAD) and ensuring sufficient supply of the yellow metal to satisfy demand from the bullion trade and jewellery manufacturers.</div><div> </div><div><table align="right" border="1" cellpadding="2" cellspacing="2" style="width: 200px"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/Stephen-Rego200.jpg" style="width: 200px; height: 200px;"></td></tr><tr><td><strong>Stephen Rego</strong></td></tr></tbody></table>GBS / GMS may have come not a moment too soon, for gold imports in August 2015 have shot up to US$ 4.95 billion as against US$ 2.06 billion a year ago, driven by a dramatic decline in prices and stocking in anticipation of the forthcoming festive season demand. </div><div> </div><div>While the basic premise of the GBS is to encourage those buying gold purely for investment purposes to switch to bonds, the GMS seeks to bring some portion of the estimated 20,000 tonnes of gold lying ‘idle’ with organisations and individuals across the country back into circulation. It allows banks to lend gold thus collected to jewellers under a Gold Metal Loan scheme. The deposited gold will also supplement RBI’s gold reserves. This will result in lower imports and reduce foreign exchange outflows. </div><div> </div><div>The government move has received an in-principle thumbs-up from the industry. The moot question is, will it deliver?</div><div> </div><div>A lot hinges on two critical aspects – attractiveness in terms of security, flexibilty and yield, and the procedures and paper work that will be required.<br> </div><div>The former will be critical in the case of the GBS, under which an investor can make purchases in denominations of 5, 10, 50 and 100 gms of gold and hold the bonds for a period of 5-7 years. The bonds will be redeemed in cash or can be traded on an exchange for early exit. The cap on individual purchases has been set at 500 gms per year. </div><div> </div><div>GBS is relatively well-designed on most parameters. The 5-7 year tenor guards against medium-term price volatility. Investors have also been given an option of one-time renewal should prices on maturity be lower than the original purchase price. Flexibility for an early exit will however depend on trading volumes. If interest rates are at ~2% as widely expected, the GBS may have some initial success, especially among urban and educated investors. An ICRA report estimates that it may result in a 5% drop in demand for physical gold over the next couple of years.</div><div> </div><div>The GMS is somewhat different. On the positive side, it seeks to iron out some of the more obvious flaws of the existing Gold Deposit Scheme, which has been in place for many years, but failed to make much of an impact. Thus the minimum deposit amount has been reduced to 30 gms from 500 gms earlier, widening the potential customer-base. There are also diffferent tenors which will have varying (though yet to be announced) interest rates and redemption options, which will appeal to different sections who wish to monetise their gold holdings. Also jewellery /ornaments have been excluded from the scheme, based on the valid assumption that households and individuals will be reluctant to part with what are mostly family heirlooms. </div><div> </div><div>The customer will now have a Gold Savings Account, instead of the certificate that was issued earlier. However, on the flip side, the person opening the Gold Savings Account has to complete KYC compliance, which many may be reluctant to do. This is not only true for those who have purchased gold with undeclared income, but also for those who hold gold that is legitimately inherited, but does not have any documentation. The same holds true for gold bought by rural households, even when it represents legally earned income from agriculture. These sections will be wary about entering the scheme.</div><div> </div><div>Inadequate infrastructure could also prove to be an impediment. All gold deposited under the GMS will be sent for assaying to determine its actual purity (unfortunately in India, undercaratage, or the practise of using gold of a lower purity than formally declared, is quite widespread) before the actual amount of deposit is finalised. Experts believe that the 300 or so assaying centres across the country will be insufficient to ensure speedy turnaround and the resulant delays and lack of transparency will impact consumer confidence.</div><div> </div><div>A more serious obstacle is of course cultural. In India, buying gold is a centuries old tradition, and even when jewellery is mostly seen as a store of value, rather than an adornment. Longer term success of the GBS and GMS depends a lot on how effectively the government can manage to change this thinking. </div><div> </div><div> </div><div><em>Stephen Rego has been a journalist since the mid-1980s, and has spent close to two decades tracking the gem and jewellery industry while holding different editorial positions in industry specific publications and websites</em></div><div> </div>
