Why Did the Modi Government Shut Down the Gold Monetisation Scheme? – A Detailed Analysis
Introduction:
The Gold Monetisation Scheme (GMS) was launched by the Government of India in 2015 to encourage people to deposit their idle gold in banks and earn interest on it. The primary objective was to bring the gold stored in households into the formal economy and reduce India’s dependence on gold imports. However, the Modi government recently decided to discontinue this scheme, raising several questions.
This article provides a detailed analysis of the reasons behind the closure of GMS, its shortcomings, and the government’s future strategies.
Purpose and Functioning of the Gold Monetisation Scheme (GMS):
The main aim of GMS was to motivate people to deposit their idle gold in banks and earn returns. Under this scheme:
1. Interest on Gold:
Depositors were offered annual interest rates ranging from 2.25% to 2.50%.
2. Lock-in Period:
The scheme had a lock-in period ranging from 1 year to 15 years.
3. Option to Withdraw Gold:
Depositors had the option to withdraw their gold in physical form or as cash.
4. Tax Benefits:
The interest earned on gold deposits was entirely tax-free, offering an additional advantage to investors.
Key Reasons for Shutting Down the Gold Monetisation Scheme:
1. Low Response and Minimal Gold Deposits:
Despite the scheme’s attractive benefits, it failed to attract the expected number of participants.
India has over 25,000 tons of gold stored in households, but from 2015 to 2024, only 25-30 tons of gold was deposited under this scheme.
This amount was negligible compared to the expected outcomes, highlighting the scheme’s failure.
2. Cultural and Traditional Mindset:
In India, gold is not just an investment but also a part of cultural and religious traditions.
Gold holds significance in weddings, festivals, and religious ceremonies, making people hesitant to part with it.
Many feared that they would not receive the exact gold they deposited but rather its monetary equivalent, leading to reluctance in participating in the scheme.
3. Complex Process and Lack of Awareness:
The process of participating in the scheme was complex, and there was a lack of awareness among the public.
Verifying the purity of gold, transferring it to banks, and understanding the terms of the scheme involved multiple steps, deterring potential depositors.
Additionally, there was uncertainty about the safety and timely return of the deposited gold, which further reduced public trust.
4. Low Interest Rates and Lack of Attraction:
The interest rates offered under GMS (2.25% to 2.50%) were not attractive enough to lure investors.
When other investment options such as fixed deposits, mutual funds, and real estate offer higher returns, people had little incentive to opt for GMS.
The low returns failed to create sufficient interest among the masses.
5. Lack of Infrastructure and Logistics:
To ensure the smooth functioning of GMS, a robust infrastructure for storing and securing gold was needed, which was not adequately developed.
Only a limited number of banks participated in the scheme, restricting its reach to urban areas and excluding a large section of the population.
Reasons Given by the Modi Government for Discontinuing GMS:
1. Failure to Achieve Desired Results:
Considering all the challenges and the low response, the government decided to discontinue the scheme.
Despite the ambitious goal of mobilizing 25,000 tons of gold, only 0.1% of this target was achieved.
The negligible gold deposits did not justify continuing the scheme.
2. Focus on New Gold Policies and Alternatives:
The Modi government is now focusing on Gold Exchanges and Digital Gold as alternative investment options.
Digital Gold allows people to invest in gold without the need to physically store it, offering a more secure and convenient option.
Through Gold Exchanges, individuals can trade gold like other financial assets, providing better returns and liquidity.
3. Revised Gold Policy and Import Control:
The government is working on a new gold policy aimed at reducing gold imports and promoting indigenous refining and gold investments.
Can GMS Be Revived in the Future?
Despite its failure, the government may consider relaunching GMS with modifications in the future.
Digital Gold and Gold Bonds: The government is promoting digital gold and sovereign gold bonds (SGBs) as modern alternatives to GMS.
Increased Tax Incentives: If higher tax incentives and better interest rates are offered in the future, GMS could regain public interest.
Government’s Future Strategy:
The Modi government is now focusing on ‘Gold Exchanges’ and ‘Digital Gold’ as part of its new gold policy.
1. Promoting Gold Trading:
The government is working on strengthening gold exchanges to ensure transparency and better returns for gold investors.
2. Expansion of Digital Gold and Gold Bonds:
Digital gold and sovereign gold bonds are being positioned as safe and attractive investment options.
3. Reducing Import Dependency and Promoting Indigenous Refining:
The government is encouraging indigenous gold refining to reduce dependence on imported gold and boost domestic production.
Conclusion:
The discontinuation of the Gold Monetisation Scheme (GMS) is a significant economic decision. The scheme failed primarily due to people’s traditional mindset, low interest rates, and the complexity of the process. However, the government is now exploring new avenues through digital gold and gold exchanges to bring India’s idle gold into the economy. If future versions of GMS offer higher interest rates, better tax benefits, and simplified processes, the scheme might succeed in attracting public participation.
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