Why Gold Monetisation Scheme 2015 will be a spectacular
failure
Indians simply love
gold--there is no rationale or logic--the buying decision is more of a
psychological or emotional one. The same is true across the globe except in the
US or a few other nations.
We love something tangible
such as gold--we can feel it, touch it, kiss it, display it or wear it. You
can also lend it or borrow money against gold ornaments. Gold as a financial
asset is not very successful in India.
Government and
regulatory authorities say gold is an unproductive asset. But most of the
Indian public doesn’t buy this argument. Their lust for gold is enormous;
nobody can change the views of the people.
Government’s sermons on
discouraging Indians to buy physical gold won’t work. Indians see it as a
highly liquid asset—though they get shortchanged routinely by gold merchants
and jewelers in the form of less weight, higher rates, making charges and
others.
Governments have no
business to tell people what they want to buy or consume. They can’t say gold
is undesirable for you. People are intelligent enough to make their own
choices.
Many believe gold is a
safe instrument in times of crises, war or other disasters. There is no point
in fighting such views. Humans love for gold will continue forever—its demand
may wane or rise depending on factors such as central bank policies, government
fiscal policies, interest rates or financial crises.
Many Indians are wary of
governments or their schemes. Because such schemes involve a lot of paper work
and/or seen as a waste of time. Physical gold works as an insurance against the
failure of governments in protecting people’s interests.
Gold may not have any
intrinsic value, but as an insurance against the ineffective monetary policies
of global central banks, physical gold acts as a perfect hedge in one’s
portfolio as part of asset allocation.
P.Chidambaram, when he
was finance minister, officially imposed several curbs on gold imports. As per
official numbers, gold imports declined for some time. But gold smuggling has
gone up. Net-net, the impact of gold curbs on India’s current account deficit
is only minimal. The gold smuggled will reflect elsewhere in India’s imports.
Once the government
loosens its curbs, Indians will buy more gold in a resurgent way. The
suppressed demand for gold may rear its head in future.
Gold
Monetisation Scheme 2015:
With a view to
mobilizing physical gold from Indians, the Government of India last month launched
a scheme named Gold Monetisation Scheme 2015, to be implemented by scheduled
commercial banks across India.
In the words of the
government, the objective of the scheme is “mobilizing
the gold held by households and institutions in the country and to putting this
gold into productive use.”
India’s central bank
Reserve Bank of India, a few days back, issued directions to banks on the
implementation of the scheme.
Seven
reasons why Gold Monetisation Scheme 2015 will be a spectacular failure:
1) Any government scheme comes with a lot of
stupid and bureaucratic rules. Though GMS 2015 is a slight improvement over the
old gold deposit scheme, the new scheme has its own share of complexity. If
anything can’t be explained in one minute to a user, the product is bound to
fail.
2) As the RBI circular on GMS shows, the product
involves a lot of costs for banks. These high costs will deter banks from
offering this product with a lot of enthusiasm—unless the Modi government
batters this product on bankers’ heads the way it had successfully done with
the Jan Dhan Yojana. Deposits under the Gold Monetisation Scheme will attract
CRR and SLR—the statutory requirements of Reserve Bank of India.
3) Let us come to the user. Gold is the easiest
conduit for black money in India. All the government’s evangelistic zeal for
GMS 2015 will make users wary of its ultimate intentions. I mean the suspicion
is that Modi government will try to target black money holders in the name of
GMS. Indians are completely put off by moralizing (from the likes of P.
Chidambaram and Arun Jaitley) which describe gold as unproductive. Most Indians
including the poor hold gold as it’s highly liquid.
4) Indians have enormous lust for gold and gold
ornaments. These gold bugs will not like their gold ornaments being melted into
gold bars. This is the most deterrent factor of this product for the end user.
5) Banks may offer only two percent annual
interest on this product. As such it’s not worth going for a product that
offers very low interest. Under the current market conditions, there are a
plenty of products that offer higher interest.
6) There are only 331 Assaying
and Hallmarking Centres in India—and most of them are concentrated in South
India. This number is too small for the success of this product.
7) Know-your-customer (KYC)
rules are applicable for this scheme. When they hear KYC, more than 50% of the
public will run away from the product! Without doubt, KYC is the most dreadful
word in India right now!
Written with malice and
jaundiced eyes against all governments:
Copyright © RamaKrishna Vadlamudi—24 October
2015.
Please read the following links for full details
of the scheme:
1) Government of India notification on GMS 2015:
2) RBI circular on GMS 2015:
Disclosure: Gold does not form part of my asset
allocation—that is to say I don’t own gold in any form.
Disclaimer: The author is an investment
professional. The views are personal. His views should not be construed as
investment advice. Before making any investments, you are advised to consult
your registered financial advisor. The author will in no way responsible for
the decisions taken by readers.
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