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India’s Gold Monetization Schemes (GMS) Struggling

March 25th, 2016 by

There’s definitely some truth to the claim that once the public has gold in their possession, you’ll find it hard to take it back from them! This is apparently no truer any place else than India, where a government initiative known as GMS has been almost entirely ineffective.

The “Black Hole” for Gold

The Indian people hold a staggering amount of gold bullion privately—an estimated 20,000 metric tonnes, or more than 643 million troy ounces. This is why it is referred to as the “world’s sink for gold.” For centuries, gold has consistently flowed into India (and at a growing pace) with virtually none of it exported.

india-gold-noOfficially for months (and, in only a vaguely codified way, for many years) the Indian government has attempted to “put to use” all of this privately held gold, whether it is held by families in the form of jewelry or is sitting idle in temples as religious offerings. It is seen as sacrilege for the authorities to take these donations out of the temples, but they likely add up to hundreds of tonnes of pure gold.

Through the new Gold Monetization Schemes (GMS), the pro-business administration of Prime Minister Narendra Modi has hoped to convert a portion of this fantastic gold bullion stockpile into something beneficial to the country’s “economic baseball card”—it’s boiled-down statistics about gross domestic product (GDP) and other measures of general wealth and prosperity. Each year, the 800-900 tonnes of net gold imports into India decimate the officially reported trade deficit.

PM_Modi_2015The GMS include enticing citizens to trade in their bullion for interest-bearing bank accounts, among other measures. Even with the somewhat modest target of 50 tonnes “monetized” (0.0025% of that total in private hands) in its first year of operation, the Modi government’s GMS have fallen woefully short of its target after more than a third of that time span: A meager 3 tonnes has been collected from the populace since GMS were first put in place in November.

Jewelers Take a Stand

Clearly, the people of India aren’t buying into the government’s fittingly named “schemes.” The sharp criticisms of the GMS come amid several other legal affronts on gold-buying: not only excise and sales taxes on gold, not to mention import duties, but also by discouraging rural customers from buying gold jewelry due to new tax ID requirements for modestly large expenditures. Approximately as much as 70% of the country’s gold-buyers are rural farmers with no bank accounts or tax IDs to speak of.

india-goldJewelers were losing business (and getting their profit margins squeezed) by these burdensome laws meant to discourage gold purchases. 300,000 jewelers are employed in the country, and although many of them simply helped customers circumvent the tax ID rule, the negative impact on their businesses was too much to swallow. The jewelers staged a nationwide strike in defiance of the tax laws and GMS, even symbolically holding a “funeral” for their industry, sarcastically saying they were leaving their shops to the bureaucrats, lawmakers, and administration to run themselves.

It remains to be seen how this tug-of-war between the people and the government over who gets to hold the gold plays out. One thing certainly won’t change: India will continue to be the global “sink” of gold demand, just as it has since the time of the Roman Empire.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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