DAW 12th May 2026, Mains Answer Writting 2027

DAW 12th May 2026, Mains Answer Writting 2027

Question

Craze for gold in India has led to a surge in import of gold in recent years and put pressure on Balance of Payments and external value of the rupee. In view of this, examine the merits of the Gold Monetization Scheme. (10 marks)

Model Answer

Approach:

  • Introduction

  • Begin by linking India’s high gold consumption with rising imports and their impact on the Current Account Deficit (CAD), Balance of Payments (BoP), and rupee value.

  • Then briefly introduce the Gold Monetization Scheme (GMS) as a government initiative to mobilise idle domestic gold and reduce import dependence.

  • Body

  • First, briefly explain the key features of the Gold Monetization Scheme in 2–3 points.

  • Then structure the answer around the “merits” of the scheme.

  • After discussing merits, add a short critical dimension by mentioning major challenges and recent discontinuation of medium- and long-term deposits.

  • Finally, add a brief way forward focusing on better incentives, awareness, digitalisation, and trust-building measures.

  • Conclusion

  • Conclude by stating that the Gold Monetization Scheme is an important step towards reducing pressure on the BoP and rupee by converting idle gold into productive economic capital.

  • Mention that reforms and improved implementation are necessary for the scheme to achieve its full potential.

Introduction India is among the world’s largest consumers and importers of gold due to cultural preferences, investment demand, and its perception as a safe asset. Despite possessing one of the world’s largest private gold reserves, around 85-90% of the gold used in India is imported, which translates to roughly 700-900 tonnes annually. In value terms, India imports over $50 billion worth of gold in a year, highlighting the scale of this dependence. To address this paradox, the Government of India launched the Gold Monetization Scheme (GMS) in 2015 to mobilise idle household gold and integrate it into the formal economy. Body Gold Monetization Scheme (GMS)

  • The Gold Monetization Scheme was launched on 15 September 2015 with the objective of reducing dependence on imported gold and mobilising idle domestic gold for productive purposes.

  • Under the scheme, individuals can deposit gold in the form of jewellery, bars, and coins with designated banks.

  • Depositors earn interest on the gold deposited, thereby converting idle gold into an income-generating financial asset.

  • The scheme originally consisted of:

  • Short-Term Bank Deposits (1–3 years),

  • Medium-Term Government Deposits (5–7 years),

  • Long-Term Government Deposits (12–15 years).

  • Till November 2024, around 31,164 kg of gold had been mobilised under the scheme.

  • In March 2025, the Government discontinued Medium-Term and Long-Term Government Deposits due to poor performance and evolving market conditions, while Short-Term Deposits continue at the discretion of banks.

Merits of the Gold Monetization Scheme

  • Reduction in Gold Imports

  • India imports a substantial quantity of gold annually, causing significant outflow of foreign exchange reserves.

  • Gold imports account for nearly 8% of India’s total import bill.

  • By mobilising idle domestic gold, the scheme reduces dependence on imported gold.

  • Lower imports help:

  • Reduce the Current Account Deficit,

  • Improve the Balance of Payments,

  • Reduce pressure on the rupee.

  • Between 2010 and 2013, gold imports contributed to almost one-third of India’s trade deficit, highlighting the importance of such a scheme.

  • Productive Utilisation of Idle Gold

  • Indian households collectively hold close to 25,000 tonnes of gold, making it the world’s largest private gold reserve.

  • At current prices, this gold stock is estimated at nearly $2.4 trillion, equivalent to more than 55% of India’s GDP.

  • Much of this gold remains locked in households and lockers without contributing to economic productivity.

  • The scheme converts dormant wealth into productive economic capital.

  • Mobilised gold can be used for:

  • Lending to jewellers,

  • Jewellery manufacturing,

  • Meeting domestic demand.

  • This improves efficiency in the utilisation of national resources.

  • Promotion of Financialisation of Savings

  • Indian households traditionally prefer physical gold over financial instruments because gold is viewed as a secure store of value.

  • The scheme encourages citizens to deposit gold in the formal banking system.

  • This promotes:

  • Financial inclusion,

  • Banking penetration,

  • Shift from physical to financial savings,

  • Formalisation of household wealth.

  • Financialisation of savings strengthens the banking system and increases the availability of capital for productive investments.

  • Strengthening of Domestic Capital Formation

  • India cannot rely indefinitely on volatile foreign capital flows to finance growth.

  • Global investment flows declined by more than 11% in 2024, while international project finance deals fell sharply.

  • In such conditions, mobilising domestic wealth becomes essential for economic self-reliance.

  • A successful Gold Monetization Scheme can create a large domestic pool of capital for:

  • Infrastructure,

  • Manufacturing,

  • Innovation,

  • Development financing.

  • This aligns with the broader vision of Atmanirbhar Bharat and financial self-reliance.

  • Benefits to Depositors

  • Depositors earn interest on gold that would otherwise remain idle.

  • The scheme reduces locker and storage costs associated with physical gold.

  • Depositors receive tax benefits such as:

  • Exemption from capital gains tax,

  • Exemption from wealth tax,

  • Tax-free interest earnings.

  • Depositing gold with banks also improves safety and reduces the risk of theft.

  • Support to Gems and Jewellery Sector

  • India’s gems and jewellery sector contributes nearly 7% to GDP and supports over 5 million livelihoods.

  • Mobilised domestic gold can reduce import dependence for jewellers and improve availability of raw material.

  • This lowers input costs and strengthens export competitiveness.

  • Greater availability of recycled domestic gold can support employment generation and manufacturing growth.

  • Strengthening of External Sector Stability

  • Reduced dependence on imported gold improves India’s external sector resilience.

  • The scheme helps:

  • Improve foreign exchange management,

  • Reduce trade deficit,

  • Lower vulnerability to global price fluctuations.

  • It contributes to macroeconomic stability and enhances investor confidence.

Challenges Limiting the Effectiveness of GMS

  • Poor Public Participation

  • Despite India’s massive gold holdings, participation in the scheme has remained limited.

  • Only around 31,164 kg of gold had been mobilised till November 2024.

  • Reasons for Limited Participation include:

  • Emotional and cultural attachment to jewellery.

  • Fear of melting ancestral ornaments.

  • Lack of trust in purity testing mechanisms.

  • Low awareness regarding scheme benefits.

  • Procedural inconvenience and low returns.

  • Inadequate Infrastructure

  • A strong gold monetisation ecosystem requires:

  • Assaying centres,

  • Hallmarking infrastructure,

  • Secure logistics networks.

  • Although the number of BIS-registered hallmarking and assaying centres has increased in recent years, coverage remains inadequate.

  • Large parts of the gold market still consist of unbranded gold with uncertain purity, making recycling difficult.

  • Trust Deficit and Operational Challenges

  • Trust remains the biggest challenge in monetising household gold.

  • Depositors fear:

  • Loss of jewellery value,

  • Melting of traditional ornaments,

  • Tax scrutiny.

  • Complex procedures and inadequate awareness discourage participation.

  • Banks have shown limited enthusiasm because of operational costs and limited commercial viability.

  • Rising Gold Prices and Fiscal Burden

  • Gold prices rose sharply by more than 41% between 2024 and 2025.

  • Rising prices increased the fiscal burden of Medium-Term and Long-Term Government Deposits.

  • Consequently, the Government discontinued these components in March 2025.

  • Low Interest Rates

  • Interest rates offered under the scheme have generally remained unattractive.

  • Many households prefer:

  • Retaining physical gold,

  • Sovereign Gold Bonds,

  • Gold ETFs,

  • Using gold as collateral for loans.

Conclusion The Gold Monetisation Scheme is an important initiative to reduce dependence on imported gold and improve macroeconomic stability. It helps in mobilising idle gold, reducing pressure on the Balance of Payments, strengthening the external sector, and promoting financialisation of savings. However, cultural attachment to gold, poor public participation, operational challenges, and fiscal concerns have limited its success. Therefore, a transparent, technology-driven, and incentive-based reform of the scheme is necessary to effectively utilise India’s vast idle gold reserves and reduce pressure on the rupee and foreign exchange reserves.