Gold Monetisation Scheme
Govt discontinues Gold Monetization Scheme
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gold Monetisation Scheme (GMS)
Why in the News?
The Centre has decided to discontinue the Gold Monetization Scheme (GMS) starting from March 26, 2025, considering evolving market conditions.
The short-term deposits (1-3 years) will continue at the discretion of individual banks based on commercial viability, highlighting a shift towards flexible, shorter-term options.
About Gold Monetization Scheme (GMS) and its Features
- The GMS was launched in November 2015 as an enhanced version of the Gold Deposit Scheme (GDS) and Gold Metal Loan (GML) Scheme.
- The main goal was to mobilize idle gold from households and institutions into the formal economy, thereby reducing the country’s reliance on gold imports and improving the current account deficit (CAD).
- Objectives: Aimed at mobilizing gold, reducing gold imports, and utilizing gold to generate interest as a financial asset, thereby strengthening the economy.
- The GMS included three deposit options:
- Short-Term Gold Deposit (STGD): 1-3 years
- Medium-Term Gold Deposit (MTGD): 5-7 years
- Long-Term Gold Deposit (LTGD): 12-15 years
- Interest and Redemption:
- Short-Term Deposits: Interest rates determined by individual banks; redemption could be in cash or gold.
- Medium- and Long-Term Deposits: Fixed interest rates at 2.25% (medium-term) and 2.5% (long-term), with cash redemption only.
- Eligibility Criteria:
- Open to individuals, institutions, and government entities.
- Gold tendering accepted only at designated Collection and Purity Testing Centres (CPTC) or through GMS Mobilisation Agents.
- Deposits were accepted only if the value exceeded ₹1 lakh.
Reasons for Discontinuation
- The Finance Ministry discontinued the Medium-Term and Long-Term Deposits due to changes in the gold market.
- Gold prices surged by 41.5% from ₹63,920 per 10 grams in January 2024 to ₹90,450 per 10 grams by March 2025.
- This rise in gold value reduced the attractiveness of schemes like GMS for both depositors and the government.
- With the closure of the Sovereign Gold Bond Scheme, the government aims to shift towards more market-oriented solutions for gold-related financial products.
| [UPSC 2016] What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?
1. To bring the idle gold lying with Indian households into the economy. 2. To promote FDI in the gold and jewellery sector 3. To reduce India’s dependence on gold imports Select the correct answer using the code given below: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 |
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Gold Monetisation Scheme
What Laws govern Import of Gold into India?
Note4Students
From UPSC perspective, the following things are important :
Mains level: India’s Gold Imports
Why in the News?
India is facing a rise in gold smuggling due to higher global gold prices, with a recent high-profile case where an actor was arrested for smuggling over 14 kg of gold from Dubai to Bengaluru.
Laws Against Gold Smuggling in India:
- Gold smuggling is regulated by the Customs Act, 1962.
- Sections 111 & 112 allow confiscation and fines for illegal imports.
- Section 135 provides up to 7 years imprisonment if the smuggled goods’ value exceeds ₹1 lakh.
- Under the Baggage Rules, 2016, men abroad for 1+ year can bring 20g duty-free (₹50,000 cap); women can bring 40g (₹1 lakh cap).
- Customs duty rates:
- 3% duty: Men (20-50g), Women (40-100g).
- 6% duty: Men (50-100g), Women (100-200g).
- 10% duty: Beyond these limits.
- The Bharatiya Nyaya Sanhita, 2023, punishes organized smuggling with 5 years to life imprisonment under Section 111.
- Under UAPA Section 15, smuggling that affects India’s monetary stability is treated as a terrorist act, attracting life imprisonment.
- The Supreme Court (2003) ruled that non-compliant imports are prohibited goods, liable for confiscation and punishment.
India’s Gold Imports:
- India is the second-largest gold consumer after China, with gold making up 5% of total imports, mostly for the jewellery industry.
- Major import sources: Switzerland (40%), UAE (16%), South Africa (10%).
- Budget 2024 reduced import duty from 15% to 6% to control smuggling and balance trade.
- In April-July 2024-25, gold imports dipped by 4.23%, easing pressure on the Current Account Deficit (CAD).
- April-June 2024:
- Gems & jewellery exports: US$ 6.87 bn.
- Diamonds: 53.47%, gold jewellery: 32.39% (US$ 608 mn), silver jewellery: 3.36%.
- Gold jewellery imports: US$ 88.61 mn (June 2024).
- Major production hubs: Surat, Mumbai, Jaipur, Thrissur, Nellore, Delhi, Hyderabad, Kolkata.
- India targets US$ 100 billion gems & jewellery exports by 2027, making it a focus sector for export promotion.
PYQ:[2016] What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’? 1. To bring the idle gold lying with Indian households into the economy. 2. To promote FDI in the gold and jewellery sector. 3. To reduce India’s dependence on gold imports. Select the correct answer using the code given below: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 |
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Gold Monetisation Scheme
Gold Investments in India Surge by 60% in 2024: World Gold Council Report
Note4Students
From UPSC perspective, the following things are important :
Mains level: Market Economy; Demand and Supply; Gold Market;
Why in the News?
According to the World Gold Council, Gold investments in India increased by 60% in 2024, reaching $18 billion (around Rs 1.5 lakh crore), compared to the previous year.
What are the Key highlights of the Report?
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What are the reasons for the Increase in Gold Demand in India?
- Cultural Significance: Gold is deeply ingrained in Indian culture, and its purchase is considered auspicious during festivals and weddings. For example, bridal jewelry alone accounts for at least half of the gold jewelry market share in India.
- Investment and Hedge Against Uncertainty: Gold is seen as a safe haven investment, especially during times of economic and geopolitical instability. For instance, geopolitical tensions, such as the conflict between Israel and Hezbollah, have increased demand for gold as investors seek a safe-haven asset.
- Inflation Hedge: Gold is considered a hedge against inflation, preserving wealth when the purchasing power of fiat currencies declines. For every 1% increase in inflation, gold demand increases by 2.6%.
- Central Bank Buying: Central banks, including the Reserve Bank of India (RBI), increase their gold holdings to diversify forex reserves and hedge against external uncertainties. The RBI bought 19 tonnes of gold in the first quarter of 2024, already surpassing the 16 tonnes purchased in all of 2023.
- Weakening Dollar: When the US dollar weakens, it becomes cheaper for investors holding other currencies to buy gold, increasing demand and driving prices up. A weaker dollar boosts demand, as seen with the US dollar easing by 0.2% and leading to an increase in gold prices.
What is the present Status of Gold Resources?
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What are the negatives of buying physical gold for the country?
- Increases Trade Deficit & Current Account Deficit (CAD): Countries with high gold imports, like India, see a widening trade deficit, as more foreign exchange is spent on gold rather than productive assets. Example: In 2023, India’s gold imports surged to over $43 billion, contributing to a rising CAD (Current Account Deficit) and putting pressure on the rupee.
- Encourages Smuggling & Black Market Activities: High demand and import duties often lead to illegal gold smuggling, fueling the underground economy. Example: In 2022, 1,000+ kg of gold was smuggled into India, bypassing import duties and causing tax revenue losses for the government.
- Non-Productive Asset & Storage Risks: Unlike stocks or bonds, gold does not generate income and remains idle in lockers, reducing capital available for economic growth. Example: In Turkey, during economic crises, citizens hoarded gold instead of investing in businesses, slowing economic recovery.
Way forward:
- Promote Gold-Backed Financial Instruments: Encourage investments in Sovereign Gold Bonds (SGBs), Gold ETFs, and Digital Gold to reduce reliance on physical gold while ensuring capital appreciation and interest earnings.
- Implement Smarter Import Policies & Monetization Schemes: Rationalize import duties to curb smuggling and expand gold monetization schemes to bring idle gold into the formal financial system, boosting liquidity and economic growth.
Mains PYQ:
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.(UPSC IAS/2015)
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Gold Monetisation Scheme
Why the government could discontinue the sovereign gold scheme?
Note4Students
From UPSC perspective, the following things are important :
Mains level: Issues related to gold;
Why in the News?
Sovereign gold bonds provide a safer and more cost-effective alternative to holding physical gold, as they reduce risks and storage expenses. However, the central government is considering discontinuing the SGB scheme.
What is the Sovereign Gold Bond scheme?
| About | GOI launched it on October 30, 2015. |
| Structural Mandate | Nodal Agency: Ministry of Finance; Issued by RBI on behalf of the GOI. |
| Aims and Objectives | To reduce dependence on gold imports and shift savings from physical gold to paper form. |
| Targeted Beneficiaries | Residents of India, including individuals, HUFs, trusts, universities, and charitable institutions. |
| Funding Mechanism |
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| Features |
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What are the concerns regarding sovereign gold bonds?
- High Cost of Financing: The government perceives the cost of financing its fiscal deficit through SGBs as disproportionately high compared to the benefits provided to investors. This perception has led to a significant reduction in the issuance of SGBs, dropping from ten tranches annually to just two.
- Limited Issuance in Current Financial Year: In the financial year 2024-25, no new sovereign gold bonds have been issued so far, and net borrowing through these bonds has been significantly reduced from previous estimates.
- Market Competition from Physical Gold: The recent reduction in customs duty on gold from 15% to 6% has led to a surge in demand for physical gold. Investors may prefer holding physical gold over waiting for returns from debt securities like SGBs, which require maturity periods before realizing gains.
What are the challenges due to the import of Gold?
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Way forward:
- Increase Liquidity and Accessibility: Similar to gold-backed ETFs in the U.S. and Gold Bullion Securities in Australia, India can enhance the liquidity of SGBs by allowing them to be traded on stock exchanges, providing easy access and better market engagement for investors.
- Encourage Regular Investments: Drawing inspiration from Germany’s gold savings plans, India can introduce flexible investment options such as monthly or quarterly contributions, enabling dollar-cost averaging and attracting retail investors over time.
Mains PYQ:
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. (UPSC IAS/2015)
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Gold Monetisation Scheme
Issues with high gold demand
Note4Students
From UPSC perspective, the following things are important :
Prelims level: Gold monetisation scheme
Mains level: Paper 3- Gold demand in India
Context
Gold’s appeal as a safe haven is only rising: as tensions escalate in Ukraine, its price is approaching records.
Factors explaining demand for gold in India
- India is the world’s second-largest market for the yellow metal, behind China, though it produces almost none at home.
- This is partly driven by tradition.
- Brides are given jewellery as part of their dowry and it is deemed auspicious to buy bullion around certain religious festivals.
- It is a handy store of undeclared wealth, too, often stashed in wardrobes or under the mattress.
- But the pandemic has also affirmed an investment advice passed on over generations: park savings in gold as a rainy-day fund.
Concerns with such a high demand
- Vast gold imports can destabilise the economy.
- During the 2013 “taper tantrum”, when India’s foreign-exchange reserves were lower than they are now, a rush of gold imports helped push the current-account deficit to 4.8% of GDP and fuelled worries of a currency crisis.
- Savings stashed away as idle gold could be put to more productive use elsewhere.
- Indian households hold 22,500 tonnes of the physical metal—five times the stock in America’s bullion depository .
Policy measures by the government
- Import duties hover around 10%, even after cuts in last year’s budget aimed at keeping smuggling in check.
- The central bank has ramped up issuance of sovereign gold bonds, which are denominated in grams of gold.
- Of the 86 tonnes’ worth issued since 2015, about 60% were sold after the pandemic began.
- And the gold monetisation scheme, which allows households to hand gold over to a bank and earn interest, was revamped last year to reduce limits on the size of deposits.
- Lockdowns inadvertently helped the state’s agenda.
- Mobile payments platforms like PhonePe and Google Pay reported rising appetite for digital gold, which is sold online and stored by the seller.
- Money also rushed into gold exchange-traded funds (ETFs).
- Their assets hit 184bn rupees ($2.5bn) in December, a 30% rise in a year.
Conclusion
Still, only a sliver of the population, mostly well-off urban types and millennials, invest in complex financial products. A large part of India’s demand for physical gold comes from rural areas, where it seems in no danger of losing its lustre.
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PM Modi Launches 3 Gold Schemes
In a bid to rein in the gold imports and attract investors away from physical assets, PM Modi launches 3 Gold Schemes:
- Gold Coin and Bullion scheme
- Gold Monetisation Scheme
- Gold Sovereign Bond Scheme
#1. India Gold Coin and Bullion scheme
- The coin will be the first ever national gold coin minted in India and will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side.
- Initially, the coins will be available in denominations of 5 and 10 grams.
- The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy recycling.
#2. Gold Monetisation Scheme (GMS), 2015
- Scheme allows you to earn some regular interest on your gold and save you carrying costs as well.
- It replaced the existing Gold Deposit Scheme, 1999.
- It offers option to resident Indians to deposit their precious metal and earn an interest of up to 2.5 per cent.
Who can make deposits?
- Resident Indians (individuals, HUF, trusts, including mutual funds/exchange traded funds registered under Sebi norms) can make deposits under the scheme.
- No maximum limit for deposit under the scheme and the metal will be accepted at the Collection and Purity Testing Centres (CPTC) certified by the Bureau of Indian Standards.
#3. Sovereign Gold Bond Scheme
- Investors can earn an interest rate of 2.75 per cent per annum by buying paper bonds.
- Sovereign Gold Bonds will be issued in multiple tranches subject to the overall borrowing limits.
- The bond would be restricted for sale to resident Indian entities and the maximum allowable limit is 500 grams per person per year.
- They can be used as collateral for loans and can be sold or traded on stock exchanges
Few more things to know
- Minimum investment in the bond shall be 2 grams.
- The bonds can be bought by Indian residents or entities and is capped at 500 grams.
- The RBI has fixed the public issue price of sovereign gold bonds at Rs 2,684 per gram.
- The borrowing through issuance of Bond will form part of market borrowing programme of Government.
- The Bonds will be eligible for Statutory Liquidity Ratio (SLR).
Why was there a need for such schemes?
- To lure tonnes of gold from households into banking system.
- According to the World Gold Council, an estimated 22,000-23,000 tonnes of gold is lying idle with households and institutions in India.
- Huge gold imports pushed India’s current account deficit (CAD) to a record $190 billion in 2013, prompting the hike its duty on imports to a record 10 percent.
- The government wants to reduce the reliance on gold imports over time.
But, will these schemes succeed in bringing down Gold imports?
- Experts who believe, investors will still find 8 percent offered for bank deposits as more attractive.
- The present scheme will not bring out even 20 tonnes of gold.
- Investors fear that the tax department will hound them questioning the source of gold.
Okay! But tell me how good are they from investing point of view?
- A section of experts feels the interest rates being offered (on both deposits and bonds) are attractive.
- For people who have gold as an investment asset, it is a good opportunity to gain some interest out of it.
- Gold is always written off as a zero-yield instrument compared to equities, which give dividend and fixed income which gives fixed interest.
From now on, gold will not only be an instrument of security but will also give earnings and will become part of nation building.
Published with inputs from Arun