India’s Gold Monetisation Scheme

In India there is a government scheme to encourage the circulation of gold trapped in private hands to help encourage domestic economic growth. It creates a domestic source of capital that did not previously exist and reduces the reliance on temperamental foreign direct investment.

The theory is that the increased circulation of value will encourage capitalist forces to prompt and deepen private investment throughout the economy – instead of the country’s vast private golden wealth sitting idle in inactive private hands.

The programme works by encouraging private gold owners – eg temples and private individuals – to deposit their gold with the state in exchange for cash interest payments. The gold is then melted down and injected into the economy as a source for liquidity. In a nation with split equivalent priorities between gold and money – this operation increases “value supply” (instead of just “money supply”) that can be circulated reliably throughout the economy. Upon circulation, a multiplier will compound the economic stimulus and thus the benefit.

The programme’s emphasis on encouraging small gold holders’ participation is highlighted by the small size of the minimum deposit – merely 30 grams. This gives India’s housewives the opportunity to capitalise on their unwanted gold jewellery in a productive fashion.

But the programme faces the problem that gold holds a special place in the Indian psyche. Its privileged place means that people are unwilling to let go of their gold deposits – even in exchange for interest payments. Concurrently, the rising global gold prices occurring because of ongoing fears surrounding the global economy discourage individuals from releasing their gold. They rather profit from a simpler and immediate sale instead of this more complex financial exchange.

Nevertheless, this novel scheme highlights that economic policies should channel the unique facets of nations to encourage economic growth. And not rely on identikit economic policies that may work in some nation but fail in others due to localisation issues. In this case, the use of vast gold deposits that would otherwise sit in temple vaults, jewellery boxes or old-fashioned gifts provides a source of value with fewer international strings attached.

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