Q.Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme.
Model Answer
View this Question In PYQ RealmIntroduction
India's deep-rooted cultural affinity for gold has consistently driven high import volumes, with gold imports surging by 30% to USD 45.54 billion during the 2023-24 fiscal year, according to Ministry of Commerce and Industry data. This massive import bill widens the Current Account Deficit (CAD), putting downward pressure on the balance of payments and the exchange value of the Indian Rupee. To address this, the Government of India introduced the Gold Monetization Scheme (GMS) to mobilize idle domestic gold and integrate it into the formal financial system.
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Merits of the Gold Monetization Scheme
- Reduction in Gold Imports: By incentivizing households and institutions to deposit their idle gold with banks, the GMS aims to meet domestic demand using existing domestic gold reserves, thereby reducing reliance on imports.
- Impact: Successful implementation can help curb the 800-900 tonnes of gold imported annually, saving valuable foreign exchange and narrowing the trade deficit.
- Unlocking Economic Liquidity: The scheme allows depositors to earn interest on their gold holdings (ranging from 0.5% to 2.5% per annum, depending on the deposit tenure). This turns a non-productive physical asset into an active, yield-generating financial instrument.
- Stabilization of the Rupee: A reduction in gold imports lowers the demand for foreign currency (primarily US Dollars) to fund imports. This helps stabilize the external value of the Rupee and reduces volatility in foreign exchange markets.
- Strengthening the Banking System: The gold mobilized through GMS can be utilized by commercial banks to meet their statutory reserve requirements or lent to domestic jewelers, reducing the cost of credit for the jewelry sector and boosting economic activity.
- Promoting Formalization of the Economy: GMS encourages the transition of gold holdings from informal household custody into the formal financial system, enhancing transparency and reducing the security risks associated with physical hoarding.
- Mobilization of Vast Idle Assets: India holds an estimated 25,000 tonnes of idle gold in private hands. Even mobilizing a small fraction of this gold can provide substantial non-inflationary capital to support domestic economic growth.
- Support for the Domestic Jewelry Industry: Access to domestically sourced gold reduces the jewelry industry's dependence on imported raw materials, lowering manufacturing costs and enhancing the global competitiveness of Indian jewelry exports.
Conclusion
The Gold Monetization Scheme is a key policy tool designed to convert unproductive physical gold into active economic capital. While it offers clear benefits for stabilizing the Rupee, narrowing the CAD, and strengthening the banking sector, its long-term success depends on simplifying deposit procedures, raising public awareness, and offering attractive incentives to overcome cultural reluctance to part with physical gold.