Mumbai, February 1, 2018

However, FM offers no clarity on whether deposits under GMS will be cash equivalents or physical gold

After over two years of discussion, the government has finally recognised the need for a comprehensive gold policy.

“The Government will formulate a comprehensive Gold Policy to develop gold as an asset class. The Government will also establish a consumer-friendly and trade-efficient system of regulated gold exchanges in the country. The Gold Monetisation Scheme will be revamped to enable people to open a hassle-free gold deposit accounts,” finance minister Arun Jaitely said in his Budget speech on Thursday.

While he refrained from giving details he emphasized three aspects -- policy formation, gold spot exchange and tweaking gold deposit scheme.

A standing working group that the Government had set up under the finance ministry has held several round of meetings the past two years to discuss the gold policy. There have been discussions on setting up a gold board that will cover all aspect of gold policy. According to sources, since the FM has spelt out formation of a policy, clarity shall emerge on whether or not the gold board will function like a regulator.

If the proposed gold board is put in place, its legal status will be assume significance as far as the gold spot exchange is concerned. Sebi has so far been reluctant on regulating a gold exchange. Another aspect of gold policy, according to sources is to allow exports of gold refined by Indian companies. For this, India is developing the Indian Gold standard in sync with the London Bullion Market Association. Gold refineries will, in any case, have to be registered with the Bureau of Indian Standards from July, in order to meet BIS requirements.

Once India starts exporting gold, it will have a say in determining the price of the precious metal globally. So far, despite the world's largest consumer, India is only a price taker, meaning that prices in the country are determined by movements in the international market. However, a person connected with the development said, “For marking a presence in the export market, India should follow global good practices for unrefined or dore gold procurement from overseas mines. The Indian industry is moving towards responsible mineral sourcing.”

While details are yet to be revealed on the gold spot exchange, knowledgeable sources said, “Gold exchange brings transparency in bullion trade, and in the first phase, all imported B2B gold, along with gold refined in India, shall be sold on an exchange platform only and wholesalers and jewellers will have to buy their requirements solely on the exchange. Consumers will be allowed to buy bars and coins up to a certain limit in next phase, but must purchase jewellery from jewellers outside the exchange platform.”

Shekhar Bhandari, Head of Business for Forex, Derivatives and Precious Metals, Kotak Mahindra Bank said, “The FM’s announcement on revamping GMS is timely. To promote it and encourage banks to participate, I believe some more incentives, such as interest rate subvention scheme for exporters, have to be provided. India has the potential to meet the annual demand for gold from the gold monetisation scheme, and save on imports.” He said at present the bank’s total cost for gold monetisation scheme is around 5.5 per cent of the value of the metal. This includes the interest payable to investors, the cost of acquiring, processing, insuring the gold and cost of safeguarding the metal. The income generated from lending is not enough to cover these cost.

The incentives can be for a limited period of say, two years, by which time banks will be able to bring down operational cost for GMS due to higher volumes, after which the incentives can be withdrawn. The Finance minister has however not spelt out any details on tweaking GMS apart from saying that people will be allowed to open hassle-free gold deposit accounts.

According to Surendra Mehta, national secretary, Indian Bullion and Jewellers Association (IBJA), such schemes allow depositors to save money in gold in much the same way as a systematic investment plan. He wants jewellers to be involved in GMS to make it a success.

The FM has not clarified whether the deposits will be in the form of cash equivalents of the value of an ounce of gold, or physical gold in deposit account instead of GMS. The social welfare surcharge of one per cent has replaced three per cent education cess on import of gold and silver.

[The Business Standard]