Craze for gold in Indians has led to a 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 the Gold Monetization Scheme.
Subtopic: Indian Economy · External sector and gold imports
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Indians hold an estimated 20,000-plus tonnes of gold, largely idle in households and temples. High demand fuels imports that are the second-largest item in India's import bill after crude, widening the current account deficit and weakening the rupee's external value.
Why gold imports strain the economy
- Gold is a non-productive asset; imports drain foreign exchange without adding to output.
- A large gold bill enlarges the CAD, pressuring the balance of payments and depreciating the rupee.
The Gold Monetisation Scheme (2015)
The GMS allows individuals and institutions to deposit idle gold with banks and earn interest, while banks lend the metal to jewellers, replacing fresh imports.
Merits
- Mobilises idle household and temple gold into the formal financial system.
- Reduces dependence on imports, easing pressure on the CAD and the rupee.
- Earns depositors interest, turning a dead asset into a yielding one.
- Supplies domestic raw material to the gems and jewellery industry.
Limitations
- Sentimental and religious attachment discourages melting of family gold.
- Fear of scrutiny of undisclosed holdings and low interest rates.
- Limited assaying and collection (CPTC) infrastructure.
Complemented by Sovereign Gold Bonds, which offer a paper alternative to physical gold, the scheme is sound in design; success depends on trust, attractive returns and a wider collection network to genuinely reduce imports.
What an examiner expects to see
- Gold is India's second-largest import after crude oil; heavy demand widens the CAD and weakens the rupee.
- Large idle gold stock (household and temple) sits outside the formal economy.
- GMS lets people deposit gold with banks, earn interest, and banks supply jewellers, cutting imports.
- Merits: mobilises idle gold, reduces import dependence, gives depositors a return, supplies domestic industry.
- Interest earned on deposits is exempt from capital gains and income tax, adding attractiveness.
- Constraints: emotional/religious attachment, fear of scrutiny, low interest, weak assaying/collection infrastructure.
- Sovereign Gold Bonds complement GMS by offering a non-physical investment route.
- Success hinges on trust, competitive returns and a dense CPTC/collection network.
Concrete cases, schemes and judgments
- Gold Monetisation Scheme launched November 2015 (short, medium and long-term deposits).
- Sovereign Gold Bond Scheme (2015) offering fixed interest plus price-linked redemption.
- India Gold Coin with the Ashok Chakra as a domestic minting initiative.
- Collection and Purity Testing Centres (CPTCs) for assaying deposited gold.
- Current account deficit spikes during high-gold-import years (e.g., 2012-13).