Sovereign gold bond scheme

Sovereign gold bond is a scheme designed to reduce the import of physical gold and thereby reducing India’s current account deficit[CAD]. Under the scheme citizens can hold paper gold.

How does the Sovereign gold bond work?

Similar to bank deposits, instead of cash, gold is held by people under this scheme.  When gold bond is purchased one has to pay an  amount equivalent to prevailing market prices of the gold. He/ she earns interest on the the same amount at a rate of 2.5% (as notified by the government at the during issue time) for 8 years.(Tenure of gold bond). Finally on redemption one gets the prevailing market price of gold plus interest earned.

Why Sovereign Gold Bonds were introduced?

• The Government introduced these bonds to help reduce India’s over dependence on gold imports
• It aimed at changing the habits of Indians from saving in physical form of gold to a paper form with Sovereign backing.

Gold consumption in India

• Annual consumption of gold in India is in the range of 700-800 tonnes, almost all of which is imported.
• Of this, approximately 500-600 tonnes is bought by consumers as jewellery for cultural reasons (mainly for weddings). The balance is in the form of gold bars and coins for savings or investment purposes, which is what the Government hopes to convert to paper form so that both are served — investors are happy as long as they earn some returns and capital appreciation at the time of redemption, as well as it helps reduce an equivalent amount of physical gold imports.

Features of Sovereign gold bond

• Tenure : 8 years with exit option from 5th year onwards
• Interest rate 2.5%
• The Bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange.
• The issue price of the Gold Bonds will be Rs. 50 per gram less than the nominal value
• The Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, Trusts, Universities and Charitable Institutions.
• The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.Minimum permissible investment will be 1 gram of gold.
• The maximum amount subscribed by an entity will not be more 4 kg (from 0.5kg) for individuals, HUF and 20 kg for Trusts in a financial year.

Advantages and attractions of the scheme

• Can be used as collateral for loans.
• Capital gains tax exemption on redemption.
• Zero risk of theft/ impurities associated with handling of physical gold.
• Tradability through stock exchanges.
• Availability in DEMAT and paper form.

Sovereign gold bond so far

• So far, SGB has been moderately successful with the launch of eight tranches of these bonds since November 2015, garnering approximately ₹5,000 crore or about 16 tonnes of gold.
• The target was to shift part of the estimated 300 tons of physical bars and coins purchased every year for Investment into ‘demat’ gold bonds. The target mobilisation under the scheme at Rs. 15,000 crore in 2015-16 and at Rs.10,000 crore in 2016-17. The amount so far credited in Government account is Rs. 4,769 crore.

Changes announced with regard to the scheme by the government recently

• The primary change was the increase in the limit to 4 kg (from 0.5kg) for individuals, HUF and 20 kg for Trusts. The ceiling on investment will not include the holdings as collateral by Banks and Financial institutions.

• Flexibility has been given to Ministry of Finance to design and introduce variants of SGBs with different interest rates and risk protection / pay-offs that would offer investment alternatives to different category of investors.
• Specific changes have been made in the attributes of the scheme to make it more attractive, mobilise finances as per the target and reduce the economic strains caused by imports of gold and reduce the Current Account Deficit (CAD)
• To improve liquidity and tradability of SGBs, appropriate market making initiatives will be devised.

Why limits were raised for Sovereign gold bond?

• To encourage high net-worth individuals, rich farmers as well as trusts to invest in these bonds.
• The basic premise is that most Indians believe in gold as a time-tested and safe asset class and prefer it over other forms of investment.

Why SGB could not meet the set targets?

• Past SGB prices was often not in parity with the market rate which led to the SGB consumers losing money, despite earning interests.
• Import duty : Its price being pegged to a 10% import duty, any reduction in the import duty by the Government in the subsequent period would result in losses to customers.

The way forward – What more needs to be done

• The pricing of SGB ideally should be the average of the bullion price of the 60 day-period preceding the issue date of SGB.
• In case of physical delivery of bullion against SGB at a later date, import duty and IGST should be levied at the point of delivery
• To ensure further success, the Government should allow mass channels such as gold loan Non-Banking Finance Companies (NBFCs) to also market it
• Gold loan companies can help the scheme reach many more consumers in urban, semi-urban and rural areas

UPSC Corner

Prelims :Economic and Social Development – Sustainable Development, Poverty, Inclusion, Demographics, Social Sector initiatives, etc.

Mains   : GS3 –Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Prelims Perspective

UPSC prelims 2016

What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

1. To bring the idle gold lying with Indian households into the economy
2. To promote FDI in the gold and jewellery sector
3. To reduce India’s dependence on gold imports

Select the correct answer using the code given below.

a) 1 only

b) 2 and 3 only

c) 1 and 3 only

d) 1, 2 and 3

Solution: C

Mains Perspective

Model Questions

• Craze for gold in Indians has led to a 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 the Gold Monetization Scheme [UPSC Mains 2015]

Sources: The Hindu PIB  The Hindu  The Hindu Economic Times