Opinion Good as gold

While imaginative, the scheme to monetise private reserves must be backed by assurances.

Gold is an unproductive asset, and given Indians’ penchant for buying jewellery, its annual imports of 800-900 tonnes have only served to add to the country’s current account deficit. Not only that, gold stored in temple vaults and kept under lock and key by households has deprived the economy of funds, along with its multiplier and circulation benefits. This is explained to a large extent by the failure of the government and financial sector regulators to innovate savings instruments to meet different objectives. It is in this context that the idea of a scheme to monetise gold makes sense. But many clarifications and assurances will have to be made before the scheme enthuses housewives, temples, private traders and entrepreneurs to bring their treasure troves to bank counters.

The scheme’s draft guidelines indicate that the income generated — in terms of capital gains and interest — would be tax free. Banks would be free to decide the interest rate to be offered, and the income from interest would be disbursed as gold. For instance, if a woman deposits 100 grams of gold with a bank that offers 1 per cent interest a year, she will get 101 grams after a year. But tax-free returns make sense only if the interest on the gold deposit is paid in cash. The sale of physical gold, even today, does not attract a capital gains tax. A key aspect, then, would be the interest rate banks offer. If it is lower than the average savings bank rate, the scheme is unlikely to attract many depositors. Surely, banks cannot protect the capital value of the gold deposited. In other words, if the market value of gold drops during the year, the depositor will take a hit.

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Besides the tax aspect, individuals will be wary of inviting harassment. Banks will likely ask for know-your-customer details, including PAN card numbers, before they open a gold savings bank account. The fear is that the taxman — who still does not command a lot of respect, unfortunately — will get ideas based on disclosures. Women also buy gold jewellery for adornment, so the metal’s capital value is only part of its perceived worth. If banks melt the jewellery and return coins or bars, it is doubtful people will deposit gold to earn a meagre income from interest. But if temples with large holdings shift from their traditional vaults to banks, for regular income that the scheme can potentially provide to meet their day-to-day operational needs, it will gain momentum. Private traders and small and medium enterprises will take to the scheme for the liquidity it offers. Common people would adopt it, too, provided banks and the government give them the comfort of a decent and hassle-free income stream.