Model Answer
0 min readIntroduction
India has a long-standing cultural affinity for gold, leading to consistently high demand, particularly during festive seasons and weddings. This demand translates into substantial gold imports, placing significant pressure on the country’s balance of payments and contributing to the depreciation of the Indian Rupee. In 2022-23, India imported 31.9 tonnes of gold, valued at approximately $21.7 billion (as of knowledge cutoff – Dec 2023). Recognizing this challenge, the Government of India launched the Gold Monetization Scheme (GMS) in November 2015, aiming to unlock the vast reserves of gold held by households and temples and put them to productive use. This scheme intends to reduce reliance on gold imports and strengthen the Indian economy.
Understanding the Gold Monetization Scheme
The Gold Monetization Scheme (GMS) comprises three components:
- Gold Deposits: Individuals and institutions can deposit their gold with banks, post offices, or designated collection and purity verification centres.
- Gold Loans: Banks can provide loans against gold deposits.
- Gold Coinage: The scheme facilitates the minting of gold coins.
Deposits are accepted for a minimum period of 3 years and a maximum of 15 years. Depositors earn interest on their gold deposits, calculated on the basis of the prevailing market price of gold.
Merits of the Gold Monetization Scheme
Mobilizing Idle Gold Resources
India is estimated to hold over 25,000 tonnes of gold, much of which lies idle in households and temples. The GMS provides a financial incentive for individuals to deposit their gold, converting a non-productive asset into a productive one. This mobilized gold can then be utilized by banks for various purposes, including lending and investment.
Reducing Gold Imports
By encouraging domestic gold deposits, the GMS aims to reduce the country’s dependence on gold imports. A decrease in imports would alleviate pressure on the balance of payments and help stabilize the value of the Rupee. According to RBI data (as of knowledge cutoff – Dec 2023), gold imports accounted for approximately 7-8% of total imports in recent years. A successful GMS could potentially reduce this figure.
Promoting Financial Inclusion
The GMS encourages individuals, particularly in rural areas, to participate in the formal financial system. By depositing gold in banks, individuals gain access to financial services such as loans and interest income. This promotes financial inclusion and empowers individuals to participate more actively in the economy.
Boosting the Jewellery Industry
The scheme allows banks to lend the mobilized gold to jewellers, providing them with a stable and affordable source of gold. This can help reduce the cost of gold for jewellers and promote the growth of the jewellery industry, a significant contributor to employment and exports.
Challenges and Limitations
Despite its merits, the GMS has faced several challenges:
- Low Deposit Rates: The interest rates offered under the GMS have been perceived as relatively low, discouraging many individuals from depositing their gold.
- Tax Implications: Concerns regarding capital gains tax on the interest earned from gold deposits have also deterred potential depositors.
- Purity Verification Issues: Ensuring accurate purity verification of gold deposits has been a challenge, leading to distrust among depositors.
- Lack of Awareness: Limited awareness about the scheme, particularly in rural areas, has hindered its widespread adoption.
To address these challenges, the government has made several amendments to the scheme, including increasing the minimum deposit period and clarifying the tax implications. However, further efforts are needed to enhance the scheme’s attractiveness and ensure its success.
Conclusion
The Gold Monetization Scheme represents a significant step towards harnessing India’s vast gold reserves for economic development. While the scheme has faced challenges in its implementation, its potential benefits – mobilizing idle gold, reducing imports, and promoting financial inclusion – are substantial. Addressing the existing limitations through higher deposit rates, simplified tax regulations, robust purity verification mechanisms, and increased awareness campaigns is crucial to unlock the full potential of the GMS and contribute to a more stable and prosperous Indian economy.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.