Gold Monetisation Scheme

Why the government could discontinue the sovereign gold scheme?

Explained | Economics | Mains Paper 3: Indian Economy
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.

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.

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)

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