India Gold Scheme
A gold monetisation scheme is in the works in India.Reuters

India wants to encourage its gold-hungry population to invest in gold-backed bonds instead of buying the actual metal.

Finance Minister Arun Jaitley, who tabled the federal budget in Parliament on 28 February, proposed ways to turn 20,000 tonnes of unproductive gold owned by Indian households into cash.

Jaitley said he will persuade Indians to adopt a planned gold monetisation scheme that will replace gold deposit schemes and gold metal loans. He said depositors of gold will earn interest on their metal account.

The minister said the government will also introduce a sovereign gold bond, which will earn a fixed rate of interest.

In addition, the minister said he proposes to introduce gold coins to reduce the demand for coins minted outside India.

Somasundaram PR, Managing Director, India, World Gold Council, said in a statement: "This budget is exceptional for gold. The policy announcements on gold today are a step towards making gold a part of the larger financial system and a fungible asset class.

"Recent policy suggestions have cohesively pointed towards the need to go beyond duty cuts and artificial regulatory limitations on demand and instead focus on holistic solutions. Demand for gold cannot be wished away by supply curbs. It is imperative to nurture the savings mindset imbedded in households through gold accumulation, and then use it to enhance savings, putting it to work for the economy...

"This announcement is set to have a healthy impact on India's gold sector, but this can be realised only if trade is liberalised without artificial curbs through higher duties and other forms. The import duty at 10% continues, but we believe it should be rationalised soon.

"India will now be able to set in place a measured monetisation framework for gold from the existing stocks in private hands worth over $1tn. The monetisation scheme will drive orderly recycling and enhance transparency, benefiting millions of households and the macro economy, as it has the potential to translate gold savings into economic investments.

"Standard India gold coins will ensure gold availability aligned to customer preferences and will help in curbing the unofficial market..."

Gold demand

India's demand for gold was subdued this week as buyers in the world's leading consumer of the metal put off purchases ahead of an expected cut in import duty, from a record 10% in the federal budget, and a likely drop in local prices.

Gold prices in the subcontinent were either on par with or at a discount of $1 an ounce to the international market this week owing to sluggish demand and adequate supplies, traders told Reuters.

However, gold buying remained strong in China, the second-largest consumer. Premiums on the Shanghai Gold Exchange were at $4-$6 an ounce over the global spot price this week as Chinese buyers returned to the market following the Lunar New Year holiday. Premiums were at $3-$4 ahead of the holiday.

Imports

Between 800 and 1,000 tonnes of gold finds its way into India every year.

Last November, India scrapped a rule tying gold imports to exports despite rising inbound shipments. Under the so-called 80:20 rule, traders were required to export 20% of all gold imported into the country.

The previous Congress Party-led government made three upward revisions to the import duties on gold in 2013, to a record 10%, and rolled out restrictions tying purchases to exports to battle a widening current account deficit and stem a free fall in the rupee.