Craze for Gold and Its Impact on India’s Balance of Payments

The growing craze for gold among Indians has led to a significant increase in gold imports, which has placed substantial pressure on India’s balance of payments and contributed to the depreciation of the rupee. For instance, in recent years, India’s gold imports have surged, impacting the country’s trade deficit and foreign exchange reserves.

Merits of the Gold Monetization Scheme

The Gold Monetization Scheme (GMS), launched in 2015, aims to address these challenges by incentivizing citizens to deposit their idle gold holdings in banks. Here are some key merits of the scheme:

1. Reduction in Import Dependence: By mobilizing domestic gold holdings, the scheme helps reduce the need for gold imports. For example, in 2021, India witnessed a reduction in gold imports as a result of increased domestic gold deposits under the scheme, thereby easing the pressure on the balance of payments.
2. Boost to Domestic Economy: Deposited gold is used for monetizing gold reserves, which can be utilized by banks for lending purposes and investment in productive assets. This enhances liquidity and stimulates economic growth. For instance, the scheme encourages banks to leverage gold-backed loans, which supports small and medium enterprises.
3. Improved Foreign Exchange Reserves: By reducing gold imports, the scheme helps in stabilizing the rupee and improving foreign exchange reserves. The Reserve Bank of India (RBI) has noted that reduced gold imports have helped maintain the stability of the rupee against major currencies.
4. Encouragement of Financial Inclusion: The scheme offers interest on gold deposits, making it financially attractive for depositors. This, in turn, encourages broader participation and financial inclusion.

In summary, the Gold Monetization Scheme presents several benefits, including reducing gold import dependence, enhancing domestic liquidity, stabilizing the rupee, and promoting financial inclusion.