Narendra Modi government cuts FY18 gold scheme target by 50%

The government has trimmed by half its target for gold schemes in 2017-18, turning more realistic after struggling to achieve less than 40% of its goal for the current fiscal.

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The government is aiming at R5,000 crore from all the schemes — sovereign gold bond, gold monetisation and Indian gold coin — in 2017-18, compared with the budgeted level of R10,000 crore for 2016-17, sources told FE. The fact that the government now estimates only R3,809 crore from these schemes in 2016-17, representing just about 2% of the country’s annual consumption, suggests these are far from being a runaway success even a year and a half after their launch.

Nevertheless, the data showed performance of the schemes witnessed some improvement this fiscal from a year earlier. Even after discounting the fact that the schemes were launched only in November 2015, they had generated just R1,318 crore in the 2015-16 fiscal.

“Such schemes don’t turn into a massive hit overnight. Some teething troubles do persist, especially in the monetisation scheme. Still, there are chances that the budgeted target for 2017-18 will be exceeded, but it’s better to be conservative,” said one of the sources.

The gold schemes were launched by Prime Minister Narendra Modi in November 2015, as the government wanted to discourage imports of the precious metal and curb their debilitating impact on the trade balance.

Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities, said chances of the sovereign gold bond picking up in the coming years are brighter than those of the monetisation scheme. “The gold bond is a relatively good instrument, and with growing investor awareness and efforts by the authorities and the banks, it has potential to be a success in the coming years,” he said.

However, to make the gold monetisation scheme a success is a more challenging task, considering that Indians don’t want to part with ancestral jewellery, he said. “(Also) logistics issues at the banks need to be sorted out first,” he added.

Recently, the government launched the seventh tranche of gold bonds, offering a 2.5% annual interest to investors. Applications were accepted from February 27 to March 3, and the bonds will be issued to eligible applicants on March 17. Investors will get the interest semi-annually on the nominal value of investment.

Indian households, together the world’s largest hoarders of gold, hold a record 23,000-24,000 tonnes of the precious metal, worth at least $800 billion despite a sharp fall in international prices from their peaks in 2011, according to a study by the London-headquartered World Gold Council (WGC).

The value of the holdings is based on (conservative) international prices, which doesn’t factor in a 10% customs duty. The value would be substantially higher in rupee terms. Coupled with 557.7 tonnes of the central bank’s holdings, gold stocks at most of the known sources in the world’s second-largest consumer would represent around half of its gross domestic product. This means the gold monetisation scheme can be a success if it’s structured in a more lucrative manner to induce households to park their gold in banks.

The country’s gold demand has been shaken a tad after the note ban in November last year, as some customers feared a crackdown on gold holding as well, but long-term prospects remain bright with demand expected to average at 850-950 per annum by 2020, the WGC said. The country’s gold demand touched a seven-year low of 675.5 tonnes in 2016, although a recovery is expected in 2017.