In the run-up to the balance of payment crisis of 1991, the government had received suggestions on bolstering the country’s foreign exchange reserves, including issuing gold bonds to local investors and Non-Resident Indians. But it was only after India was forced to sell 20 tonnes of gold with a repurchase option to the Union Bank of Switzerland in May 1991 to raise $200 million and the shipping of gold to the Bank of England to raise $405 million in July 1991 that the finance ministry moved on the gold mobilisation front. By that time, the RBI had revalued its gold assets to align it with global prices and shifted to valuing it at market rates consistently.
Once foreign exchange reserves started building up with greater capital inflows after the opening up of the economy in 1991-92, the government and the RBI decided to augment the level of gold reserves too. As part of this objective, the government decided to launch a gold bond scheme in March 1993 and issued an ordinance in March of that year to facilitate this. Investors could subscribe to this scheme by depositing a minimum of 500 gm of gold which had to be melted later with no cap or limit on investment. For the investor, the return on the five-year scheme, which was open for two months, was a lumpsum interest of Rs 40 for each gram of gold. The government managed to mobilise a little over 41 tonnes, then valued at Rs 1,807 crore, because the scheme offered immunity to investors from being asked questions as to how this gold was acquired and the source of funds. The gold which was deposited then was assayed and investors given a certificate.
It certainly helped that by then the devaluation of the rupee had already taken place, much before what some policy makers believe was a reverse flight of capital to the country, cashing in on the exchange rate. The government and the RBI then worked out the details of a transaction to ensure that the gold, which technically represented the holdings of the sovereign, was transferred to the central bank which paid the equivalent rupee value for it.
The RBI has on its records that Governor S Venkitaramanan had in February 1991 — during the BoP crisis — suggested promoting a gold bank to mobilise idle gold from the public and to raise critical foreign exchange resources against long-term deposits. In fact, the central bank had also pitched for a gold management corporation which would look at how to best utilise gold, besides proposing a comprehensive national policy on gold considering that India was the largest importer of the metal.
Though some of these recommendations were not cleared, the suggestion to launch an amnesty scheme — without investors being asked questions, besides an exemption from gift and wealth tax — is what got cleared later. The 40 tonnes of gold mobilised in 1993 helped boost the RBI’s gold holdings to 400 tonnes by early 1994, prompting the central bank to consider earning an income from its growing pile of gold reserves.
Subsequently, the government launched a gold deposit scheme in 1999, hoping to attract institutions such as the Tirupati Devasthanam and other major temple trusts with large stockpiles of gold to surrender their gold. The scheme flopped with few investors opting for that — by then, the government couldn’t offer an amnesty scheme because of strictures from the Supreme Court after the famous Voluntary Disclosure of Income Scheme (VDIS).
In fact, the 1993 gold bond scheme wasn’t new as several variants had been introduced in the country before. As early as 1962, gold bonds of a maturity of 15 years were issued by the government as part of an effort to discourage buying of gold. The government then mobilised over 16 tonnes, following it up with another scheme in 1965 aimed at those having black or unaccounted money to convert gold into bonds. But these schemes didn’t click.
But these failures did not deter the government from having another go at mobilising bullion through a National Defence Gold Bonds scheme in 1980 which raised over 13 tonnes.
On Wednesday, the government approved the launch of a gold bond and monetisation scheme in keeping with the announcement in this year’s budget. Finance Minister Arun Jaitley had two interesting things to say on this. One: this wouldn’t be an amnesty scheme with normal tax provisions to be applicable. Second: the gold mobilised would be used to replenish the RBI’s reserves.
The government may have been prompted to launch such a scheme after the current account deficit worsened in 2013 and faced with a ballooning bill for importing gold. Jaitley spoke about the benefits of this scheme, including the safety aspect, lower volatility and various maturities to suit investor needs.
But as history shows, schemes without an amnesty on offer have hardly succeeded. The timing also won’t help given that gold prices have been on a southward course since it peaked a couple of years ago.