Note4Students
From UPSC perspective, the following things are important:
Mains level: Issues related to gold;
Why in the News?
Sovereign gold bonds provide a safer and more cost-effective alternative to holding physical gold, as they reduce risks and storage expenses. However, the central government is considering discontinuing the SGB scheme.
What is the Sovereign Gold Bond scheme?
| About |
GOI launched it on October 30, 2015. |
| Structural Mandate |
Nodal Agency: Ministry of Finance;
Issued by RBI on behalf of the GOI. |
| Aims and Objectives |
To reduce dependence on gold imports and shift savings from physical gold to paper form. |
| Targeted Beneficiaries |
Residents of India, including individuals, HUFs, trusts, universities, and charitable institutions. |
| Funding Mechanism |
- The Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. This ensures a sovereign guarantee for both the principal and interest payments.
- The bonds are made available for subscription in tranches. The RBI notifies the terms and conditions for each tranche, including the subscription dates and issue price, which is based on the average closing price of gold of 999 purity published by the India Bullion and Jewellers Association (IBJA).
- SGBs are sold through various channels, including scheduled commercial banks (excluding small finance banks), designated post offices, Stock Holding Corporation of India Limited (SHCIL), and recognized stock exchanges like NSE and BSE.
|
| Features |
- Sovereign gold Bonds are issued in 1-gram denominations with an 8-year tenure and early exit from the 5th year.
- The minimum investment is 1 gram, a maximum 4 kg for individuals, and 20 kg for trusts.
- Benefits include security, interest, and loan collateral.
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What are the concerns regarding sovereign gold bonds?
- High Cost of Financing: The government perceives the cost of financing its fiscal deficit through SGBs as disproportionately high compared to the benefits provided to investors. This perception has led to a significant reduction in the issuance of SGBs, dropping from ten tranches annually to just two.
- Limited Issuance in Current Financial Year: In the financial year 2024-25, no new sovereign gold bonds have been issued so far, and net borrowing through these bonds has been significantly reduced from previous estimates.
- Market Competition from Physical Gold: The recent reduction in customs duty on gold from 15% to 6% has led to a surge in demand for physical gold. Investors may prefer holding physical gold over waiting for returns from debt securities like SGBs, which require maturity periods before realizing gains.
What are the challenges due to the import of Gold?
- Impact on Trade Deficit: Gold imports are a major contributor to India’s trade deficit, with a record $14.8 billion spent in November 2024, which weakened the rupee. Between 2016 and 2020, gold imports made up 86% of the country’s gold supply, leading to significant foreign exchange outflows and economic instability.
- Encouragement of Smuggling: High import duties on gold have driven a rise in smuggling, with 65% to 75% of smuggled gold entering India through air routes. This illegal trade undermines government revenue and complicates market regulation.
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Way forward:
- Increase Liquidity and Accessibility: Similar to gold-backed ETFs in the U.S. and Gold Bullion Securities in Australia, India can enhance the liquidity of SGBs by allowing them to be traded on stock exchanges, providing easy access and better market engagement for investors.
- Encourage Regular Investments: Drawing inspiration from Germany’s gold savings plans, India can introduce flexible investment options such as monthly or quarterly contributions, enabling dollar-cost averaging and attracting retail investors over time.
Mains PYQ:
Q Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme. (UPSC IAS/2015)
Note4Students
From UPSC perspective, the following things are important:
Prelims level: Gold monetisation scheme
Mains level: Paper 3- Gold demand in India
Context
Gold’s appeal as a safe haven is only rising: as tensions escalate in Ukraine, its price is approaching records.
Factors explaining demand for gold in India
- India is the world’s second-largest market for the yellow metal, behind China, though it produces almost none at home.
- This is partly driven by tradition.
- Brides are given jewellery as part of their dowry and it is deemed auspicious to buy bullion around certain religious festivals.
- It is a handy store of undeclared wealth, too, often stashed in wardrobes or under the mattress.
- But the pandemic has also affirmed an investment advice passed on over generations: park savings in gold as a rainy-day fund.
Concerns with such a high demand
- Vast gold imports can destabilise the economy.
- During the 2013 “taper tantrum”, when India’s foreign-exchange reserves were lower than they are now, a rush of gold imports helped push the current-account deficit to 4.8% of GDP and fuelled worries of a currency crisis.
- Savings stashed away as idle gold could be put to more productive use elsewhere.
- Indian households hold 22,500 tonnes of the physical metal—five times the stock in America’s bullion depository .
Policy measures by the government
- Import duties hover around 10%, even after cuts in last year’s budget aimed at keeping smuggling in check.
- The central bank has ramped up issuance of sovereign gold bonds, which are denominated in grams of gold.
- Of the 86 tonnes’ worth issued since 2015, about 60% were sold after the pandemic began.
- And the gold monetisation scheme, which allows households to hand gold over to a bank and earn interest, was revamped last year to reduce limits on the size of deposits.
- Lockdowns inadvertently helped the state’s agenda.
- Mobile payments platforms like PhonePe and Google Pay reported rising appetite for digital gold, which is sold online and stored by the seller.
- Money also rushed into gold exchange-traded funds (ETFs).
- Their assets hit 184bn rupees ($2.5bn) in December, a 30% rise in a year.
Conclusion
Still, only a sliver of the population, mostly well-off urban types and millennials, invest in complex financial products. A large part of India’s demand for physical gold comes from rural areas, where it seems in no danger of losing its lustre.
