India is the world�s largest consumer of gold and fourth largest consumer of oil but needs to import about 97% and 73% of its annual demand respectively[i]. This excessive reliance on imports has dealt a severe blow to the nation�s current account deficit (CAD) and has severely strained the nation�s foreign exchange reserves. While a 50% drop in oil prices since June 2014 has provided some much needed respite for the Indian economy, the impact of gold imports continues to pinch. To take charge of the situation, the Finance Minister announced in the government�s maiden budget some measures aimed at monetizing gold. While the specifics of the measures still need to be ironed out, the prospects of the new scheme can be assessed by juxtaposing it with the existing schemes and with the efforts of countries which have been pioneers in gold monetization.

The success story of gold monetization in Turkey is of particular significance as its appeal to gold is similar to that of India. According to certain reports, there were close to 3,500 tons of �under the pillow� gold in 2013 which accounted for 12% of their GDP[ii]. Realizing the latent contribution of gold to the economy, policy makers employed innovative measures which reduced the impact of gold imports on the CAD and pumped significant amounts of stagnant gold into the financial system. One such measure was that of the Reserve Option Mechanism (ROM), which allows commercial banks to hold up to 30% of their statuary reserves in gold and foreign currencies. The ROM has induced banks to proactively develop instruments and design schemes to monetize household gold savings much like the course of plan proposed by the Indian government.

The Indian proposal parallels the Turkish model on its three features- the new gold deposit scheme, the sovereign gold bond and the Indian gold coin[iii] . Under the first feature, individuals, temples and other institutions can deposit their gold at specified banks and earn interest income on their idle gold holdings. The deposits of physical gold in one�s Metal Account will be assessed on the basis of purity and value, following which a fixed interest rate within the range of 1%-3% is to be apportioned. Capturing the essence of the existing Gold Deposit (GDS) and Gold Metal Loan (GML) Schemes, the new scheme is unique in how it integrates the two and enables a three-way transaction between customers, jewelers and banks. Thus, the internal recycling of gold is ensured at various levels of the process, making it equally profitable for all stakeholders.

The new scheme was proposed with the aim of revamping the existing schemes of GDS and GML, the limitations of which must be taken into account. The GDS and the GML function in a disconnected manner whereby gold is deposited by the consumer in the bank as per the specifications of GDS and lent onward by the bank to the jeweler through GML. The schemes, offered by some banks like State Bank of India, have failed miserably, with deposits of only 15 tons of gold. The reasons for failure are manifold, the most important of which is the poor interest rates being offered (0.75% – 1%). Additionally, the few banks that offer the scheme have set a minimum deposit amount of 500g, thus catering to temples rather than individuals[iv]. The lack of an efficient means to decipher the cartage and purity of gold makes it difficult to offer interest which is typically paid in grams of gold. Further, banks do not accept jewellery, assuming that customers would be reluctant to part with jewellery in return for plain gold once the investment matures.

The current scheme needs to overcome these limitations, offer lucrative returns and target all individuals irrespective of their level of gold holdings. An effective instrument for the quick assessment of gold quality must be devised and the new product needs to be widely marketed just as in the case of Turkey�s gold products.

A similar measure adopted in Turkey – the Gold Time Deposit Account Scheme- has proven to be particularly successful in incentivizing banks to become part of the gold monetization process. Through the scheme, one can earn interest income ranging from 0.8%- 1.75%[v] on their gold savings. The Term Gold Deposit Account in the Turkiye Is Bankasi AS (Turkey�s largest bank) can be opened with a minimum of 10g of gold following which one may continue investing in increments of 0.01g[vi] . These provisions make the scheme extremely appealing to individuals. Following the introduction of these accounts, Turkiye Is Bankasi AS, has increased its gold deposits tenfold in the last 2 years. Turkey boasts of a very efficient gold assessment system with several accredited assaying units where non-standardized gold can be taken and appropriate certificates are accepted by authorized buyers and sellers of gold throughout the country. In addition to this scheme, banks introduced a number of marketing tools to engage with customers, including special days for them to bring their gold to local branches and receive better prices on old gold compared to jewellery retailers.

The provisions of the Turkish scheme, if prudently emulated in the Indian scenario, has the potential to unlock 20,000 tons of gold worth more than $1 trillion and contribute substantially to the GDP growth and deficit control targets of the central government.

The second feature of India�s proposed gold monetization scheme is the sovereign gold bond which intends to provide an alternate to purchasing physical gold. Functioning like a regular coupon bearing bond issued by the government, the investor lends money to the government and receives periodic fixed coupon/interest payments on it. The price of the bond will be based on the price of a fixed quantity of gold. On maturity or sale of the bond, the holder will receive an amount equal to the value of the underlying amount of gold as on that date. The requirement for gold imports is made redundant through this mechanism as the entire transaction takes place in cash. Here comparison can be drawn between the instruments of sovereign gold bonds and gold ETFs (Exchange Traded Funds). While both are designed to track gold prices, they are different as gold bonds pay interest over the term of investment. Returns on gold ETF�s are around 1% and hence are not attractive to investors. The sovereign gold bond scheme will not only reduce gold consumption but also give people an avenue to invest in gold without holding physical gold[vii].

Lastly, the government plans to introduce an Indian Gold Coin, carrying the symbol of the Ashok Chakra. Indian consumers largely rely upon foreign gold coins to address their needs, driving a significant amount of Indian currency to foreign markets. The purpose of the measure is to reduce the demand for coins minted outside India and ensure the recycle of the gold available in the country. Similar gold bullion coins are issued in other gold consuming countries like Turkey. The Turkish government launched the Turkish Republic Coin, a branded coin which can be bought by retail investors and is the only form of gold coin sold at authorized outlets. Turkey produces both decorative and standard 22k gold coins in abundance, which has in the past decade become popular as a hedge against inflation.

Turkey�s success story of gold monetization is not limited to these features. Its success is linked with other government measures which can in the future lend to India�s ambitions as well. Turkey has several London Bullion Market Association (LBMA) certified refineries which produce gold bars and coins. Gold-based investment products like the Gold Demat Account, the Gold Based Mutual Fund where 50 per cent is invested in gold-based capital market instruments, and the Gold Pension Fund have further supplemented the process of gold monetization. Banks also created other new and innovative gold banking products. For example, gold-dispensing ATMs so consumers can easily buy hallmarked bars; and mobile apps which allow people to gift gold via one of its 300 gold-dispensing ATMs in Turkey[viii].

Although the scheme of the incumbent government has been bold and creative, the implementation process is likely to encounter many hiccups, the most important one being the propensity of traditional Indian households toward physical rather than paper gold. To remove this inertia, the government will need to bring out some specifics related to how capital appreciation will be treated from a taxation point of view and how deposit institution would be able to hedge against movements of this commodity should it become increasingly volatile in the foreseeable future. The way forward for India lies in unleashing the true potential of gold through lessons drawn from Turkey.

———Flavy Sen Sharma


1. Hewitt, A., Street, L., Gopaul K., (2015), Turkey: Gold in Action, World Gold Council

2. Soundararajan, N., Goswami, A., Bhatia, C., Jakhade, J., Bagrawat, S., (2014), Why India Needs a Gold Policy, FICCI- World Gold Council Report

3. Singh, C., Sinha, A.K., Nandkarni, A., Kumar, A., Sardar, J.K., Jain, S., Das, S., Agrawal, S., Shukla, S., (2015), Gold and India, IIMB-Working Paper No. 482









[viii] Turkey: Gold in Action, Downloadable at