Does the depositor lose the family gold forever?

No. The scheme is a deposit. Gold or rupee redemption depends on the tenor chosen; interest is the extra return.

Why not only raise import duty?

Duty curbs new bars but does not use the metal already in India, and it can push smuggling. Monetisation attacks the idle stock.

Craze for gold in Indian has led to surge in import of gold in recent years and

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India’s gold demand is met largely by imports, which widen the current account deficit and can weaken the rupee. Most domestic gold sits idle as jewellery rather than as a financial asset. Gold Monetisation Scheme 2015 pays interest on deposited gold and can supply jewellers from that stock. It replaces the older Gold Deposit Scheme and sits with Sovereign Gold Bonds and the Indian Gold Coin. Trust in assay and cultural preference for jewellery will decide actual deposits.

Model answer

Introduction

Households and temples in India hold a huge stock of gold as jewellery and bars. When prices or festivals rise, imports surge. That gold is largely unproductive: it sits in lockers while the current account deficit and the rupee take the hit. The Gold Monetisation Scheme (November 2015) tries to pull idle metal into banks and refiners.

Body

Why gold imports hurt the external account

India is among the world’s largest gold importers; the metal is a big line in the merchandise import bill after oil.
The 2013 taper-tantrum period showed how gold imports can widen the current account deficit and pressure the rupee.
Policy already used import duty, the 80: 20 export-import rule, and curbs on credit for gold — which treat the symptom, not the stock in homes.
If even a fraction of domestic gold is monetised, import demand for the same jewellery and industrial use can fall.

Merits of the Gold Monetisation Scheme

Depositors can tender gold to banks; after assay, they earn interest on the metal and may take back gold or rupees at maturity (short, medium and long tenors).
Medium- and long-term deposits can be on-lent to jewellers and refiners, so the gems and jewellery industry uses domestic metal instead of fresh imports.
The scheme replaces the weakly used Gold Deposit Scheme (1999) with clearer interest, tax treatment and a role for refiners and collection centres.
Fiscal and external merit: lower import volume eases the current account and supports the rupee, without asking households to sell family gold forever.
Temples and institutions with large holdings can earn a return instead of paying locker and security costs.
Complementary Sovereign Gold Bond and Indian Gold Coin (2015) give paper or official coin substitutes so future demand need not all be imported bars.

Limits

Cultural attachment to karat jewellery, distrust of assay, and low interest versus making charges will slow deposits.
Branch and refinery infrastructure must be trusted or the scheme stays a press note.
Monetisation does not by itself end festival demand; it only recycles existing metal.

Flow diagram

flowchart TD
  H[Household temple gold] --> I[Fresh imports]
  I --> B[CAD and rupee pressure]
  H --> G[Gold Monetisation Scheme]
  G --> R[Interest and refiner supply]
  R --> C[Lower import need]

Conclusion

Gold imports have repeatedly strained India’s balance of payments and the rupee because idle household metal is preferred to bank returns. The Gold Monetisation Scheme’s merit is to pay interest, feed jewellers from domestic stock, and cut the import bill. It will work only with trusted assay, fair interest and the bond-and-coin substitutes that absorb new demand.

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Next question on this syllabus topic (2015 · Q8). View answer →
Does the depositor lose the family gold forever?

No. The scheme is a deposit. Gold or rupee redemption depends on the tenor chosen; interest is the extra return.
Why not only raise import duty?

Duty curbs new bars but does not use the metal already in India, and it can push smuggling. Monetisation attacks the idle stock.

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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.