BackWill govt’s twin approach to curb demand for physical gold work?
Experts say govt will have to make the two new schemesgold monetization and gold bondsattractive enough for consumers to change their mindset
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New Delhi: The government seems determined to wean away Indians from their insatiable appetite for buying and stocking gold in physical form. To help them invest in gold instead, finance minister Arun Jaitley announced two schemes in this year’s budget—the gold monetization and the sovereign gold bond schemes.
The draft of both the schemes are now out in the public domain. While the monetization scheme proposes to encourage people to vest their gold with banks and earn an interest on the deposit, the other seeks to push them to invest in bonds linked to the price of gold.
But will this work in a country where, traditionally, gold is stocked by households as a hedge against inflation and currency depreciation?
Economists and consumer behaviour experts believe concerted efforts by the government can lead to a change in mindset, where Indians start looking at gold as a financial instrument that can give them returns. But for this shift to take place, the government will have to make the schemes attractive for consumers, they caution.
“There will be a shift away from gold. It is only a matter of time. Indians love for gold is a long standing behavioural pattern and will take some time to change. Individuals hold large stocks of gold that are completely unproductive in nature. If they get an opportunity to get some interest by using this gold as deposits, they will find it attractive," said Arvind Singhal, chairman of Technopak Advisors Pvt. Ltd, a retail consultancy. “But it will take more than a few months before there is any significant impact on consumer behaviour on account of these schemes," he added.
Gold stocks in India are estimated at more than 20,000 tonnes.
Chief economist at rating agency Crisil D.K. Joshi said that at present it is hard to say if consumers will shift from physical gold to these schemes but low inflation levels can make the schemes attractive.
“At least a beginning has been made by the government. The previous versions of these schemes were not successful but this time at least there is a concerted effort by the government. Also, inflation levels are low and consumers may not be attracted towards holding physical gold as a hedge against inflation," said Joshi. “There is a lot of gold lying idle in India. If this gold comes into circulation, India’s import bill will reduce.But attractive interest rates on deposits and bonds will be the key," he said.
So what can make these schemes attractive? One way is to offer interest rates that are higher than what savings accounts offer, say experts. They suggest that rates for the monetization scheme should be higher than the average of 4% offered by bank savings account. The earlier version of the monetization scheme offered a mere 1%.
The interest rate on the sovereign gold bond scheme is likely to be market-linked.
India Rating, in a report dated 19 June, said that the successful launch of sovereign gold bond may ensure that only gold used for manufacturing jewellery forms a part of the ever-growing import bill in India, and not all of physical gold. “Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock," it said.
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