NEW DELHI -- As the world's top gold buyer, India is estimated to have more than 20,000 tons of the precious metal lying idle in its households. Seeking to utilize this untraded gold and reduce imports, the government has announced a new monetization scheme.
Under the scheme, Prime Minister Narendra Modi's government plans to sell sovereign gold bonds referencing the price of gold and also introduce a gold coin as an investment product. In addition, there are also plans to introduce a gold deposit scheme whereby gold deposits can earn interest and also be used as collateral for loans.
India imports as much as 800-1,000 tons of gold each year, according to the finance ministry. Gold demand rises during the festival season from August to October and the wedding season from November to May. The yellow metal is a symbol of luck and an important gift for brides who are usually decked in gold jewelry on their wedding days. In many Indian households, gold is also held as ornaments and insurance against the proverbial "rainy day".
To that end, the government is hoping that the sovereign gold bond will be an investment alternative to holding the physical product. The introduction of the Indian gold coin will also serve this purpose and help to reduce the demand for coins minted outside the country.
Calling the gold deposit scheme a "game-changer", the State Bank of India's (SBI) research department said conservative estimates showed that even at a 30% strike rate, the monetary value of gold deposits mobilized may be as much as three trillion rupees ($47.8 billion).
"This measure could instil a sense of confidence in the public and free up resources for productive purposes," SBI said in its report.
However, for Indians who are still keen on holding gold, the proposed Indian gold coin will be a convenient and cost-effective way to add a small amount of physical metal to their portfolios, SBI said.
Research firm Capital Economics said that anything which raises the profile of gold within the monetary system is likely to boost sentiment. However, it added: "A piece of paper issued by a government, even one referencing gold, can never have the attraction or security of actually owning the precious metal in physical form. It certainly would go down badly as a wedding gift."
Some jewelers also voiced uncertainty over the government's plans. Rahul Gupta, director of jewelry chain PP Jewellers, said the government's gold deposit scheme was impractical as people were unlikely to come forward with their gold.
"There's always a threat from income tax department regarding the source of their gold," he said, referring to tax avoiders.
According to the World Gold Council, 2014 was a "standout year" for Indian jewelry. The combined volume of gold sold in India and China, the world's top two gold buyers, grew 71% over the last 10 years and the two markets accounted for 54% of total consumer gold demand in 2014, it said.