Subject: Economy

India's cultural affinity towards gold, reflected in its position as the world's sixth-largest importer with imports worth $45 billion in 2023, has significant implications for the nation's external sector stability. The Gold Monetization Scheme (GMS) was introduced as a strategic initiative to address this challenge while leveraging domestic gold holdings.

Merits of Gold Monetization Scheme

Economic Benefits

• Reduced Import Dependency: By mobilizing 31,164 kg of gold from 5,693 depositors, GMS helps reduce pressure on foreign exchange reserves and balance of payments.
• Interest Earnings: Depositors earn interest on their idle gold holdings, promoting financial inclusion and wealth creation.
• Banking Sector Support: Banks can lend gold to jewelers, reducing their borrowing costs and supporting the domestic jewelry industry.

Balance of Payments Impact

• Foreign Exchange Conservation: The scheme helps conserve foreign exchange by reducing gold imports, which reached 724 tonnes in 2024.
• Current Account Stability: Reduced gold imports contribute to narrowing the current account deficit, strengthening external sector stability.
• Exchange Rate Support: By reducing dollar demand for gold imports, GMS helps stabilize the rupee's external value.

Market Development

• Formalization: Encourages transformation of physical gold into a productive financial asset through structured deposit categories (short-term, medium-term, and long-term).
• Price Stability: Helps moderate domestic gold prices by increasing market supply through mobilization of idle gold.

Challenges and Solutions

• Limited Participation: Despite potential benefits, mobilization remains low compared to estimated household gold holdings.
• Awareness Gap: Studies show correlation between GMS awareness and its perceived positive impact on balance of payments.
• Infrastructure Needs: Requires expansion of assaying centers and refineries for efficient implementation.

India's strategic approach to gold management through GMS represents a significant step towards reducing external vulnerability while respecting cultural preferences. The scheme's success in mobilizing 13,926 kg in long-term deposits demonstrates its potential, though continuous refinement and awareness building remain crucial for achieving its broader objectives of external sector stability and financial system development.