The government gets ready to accept gold as an asset class
In the Union Budget 2018, finance minister Arun Jailtley announced the government’s intention to formulate a comprehensive gold policy, to develop gold as an asset class. In his speech, the minister said that the government will establish a system of consumer-friendly and trade-efficient and regulated gold exchanges in the country.
Additionally, it was announced that the Gold Monetization Scheme will be revamped to enable people to open a Gold Deposit Account in a stress-free manner.
This move recognizes the attachment that many Indians have with gold as an asset and an investment. India is the world’s second-largest consumer of gold, at 666 tonnes in 2016, according to the World Gold Council. The announcement made in the Budget formally recognizes that gold is bought not just for jewelry but as an asset too, and Indians rely on in more ways than one.
According to P.R. Somasundaram, managing director, India, World Gold Council, “Although the details of the policy are not known, the headline announcement is positive. It is an acknowledgement that there is more to gold policy than just import controls, and a meaningful reflection of the economic role of gold merit deeper discussion.”
In the Union Budget of 2015-16, the government had announced the Sovereign Gold Bond and then the Gold Monetisation Scheme. The former, aimed as an alternative to buying physical gold, has been accepted well by the investors; with increased number of applicants subscribing to successive issues.
The Gold Monetization Scheme however, is yet to witness a significant take-off. In it, you have to open a gold savings account and deposit any gold you have in it, in lieu of interest to be paid against the value of gold deposited.
In the Budget 2016, to incentivise the Gold Monetisation Scheme, it was proposed that the deposit certificates issued under the scheme be excluded from the definition of capital asset and, hence, be exempt from capital gains tax. Interest received from this scheme was also made exempt from tax.
Procedurally, there were certain complexities that can get ironed out now. One of the barriers this scheme faces in attracting more customers is that the gold deposited is melted. Monetisation is a way of preserving value, and with a comprehensive policy, many other stakeholders—like jewellers—can potentially get involved in the process.
Sapan Gupta, national practice head, banking and finance, Shardul Amarchand Mangaldas said, “The monetization scheme has not been able to take off well. People tend to return for their gold, be it a loan or in case of monetization schemes. Second, gold is still considered a store of cash. The announcement shows the intention towards a further attempt to formalize gold into the system. The scheme also isn’t accessible to regional rural banks, who have a store of gold through lending.”
Will it help demand
Domestic demand for gold has fallen over the last few years. According to data from the World Gold Council, consumption demand peaked at around 1,000 tonnes in 2010, and demand fell sharply by 22% in 2016 after import curbs on gold were placed.
The Budget 2018 announcement suggests that there will be initiatives to utilize gold’s ability as a financial asset. The gold loan industry, for example, is widespread and an effective medium for creating liquidity from this physical asset. The efforts, though, may not translate directly into higher demand in the short term, rather they will aid in greater transparency.
“The recognition that it is an asset class will underpin initiatives on standards and value addition, which in turn will aid integration of the sector with the formal channels,” said Somasundaram.