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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Gold Monetisation Scheme

Issues with high gold demand

| Economics | Mains Paper 3: Indian Economy

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.

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PM Modi Launches 3 Gold Schemes

In a bid to rein in the gold imports and attract investors away from physical assets, PM Modi launches 3 Gold Schemes:

Gold Coin and Bullion scheme
Gold Monetisation Scheme
Gold Sovereign Bond Scheme

#1. India Gold Coin and Bullion scheme

The coin will be the first ever national gold coin minted in India and will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side.
Initially, the coins will be available in denominations of 5 and 10 grams.
The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy recycling.

#2. Gold Monetisation Scheme (GMS), 2015

Scheme allows you to earn some regular interest on your gold and save you carrying costs as well.
It replaced the existing Gold Deposit Scheme, 1999.
It offers option to resident Indians to deposit their precious metal and earn an interest of up to 2.5 per cent.

Who can make deposits?

Resident Indians (individuals, HUF, trusts, including mutual funds/exchange traded funds registered under Sebi norms) can make deposits under the scheme.
No maximum limit for deposit under the scheme and the metal will be accepted at the Collection and Purity Testing Centres (CPTC) certified by the Bureau of Indian Standards.

#3. Sovereign Gold Bond Scheme

Investors can earn an interest rate of 2.75 per cent per annum by buying paper bonds.
Sovereign Gold Bonds will be issued in multiple tranches subject to the overall borrowing limits.
The bond would be restricted for sale to resident Indian entities and the maximum allowable limit is 500 grams per person per year.
They can be used as collateral for loans and can be sold or traded on stock exchanges

Few more things to know

Minimum investment in the bond shall be 2 grams.
The bonds can be bought by Indian residents or entities and is capped at 500 grams.
The RBI has fixed the public issue price of sovereign gold bonds at Rs 2,684 per gram.
The borrowing through issuance of Bond will form part of market borrowing programme of Government.
The Bonds will be eligible for Statutory Liquidity Ratio (SLR).

Why was there a need for such schemes?

To lure tonnes of gold from households into banking system.
According to the World Gold Council, an estimated 22,000-23,000 tonnes of gold is lying idle with households and institutions in India.
Huge gold imports pushed India’s current account deficit (CAD) to a record $190 billion in 2013, prompting the hike its duty on imports to a record 10 percent.
The government wants to reduce the reliance on gold imports over time.

But, will these schemes succeed in bringing down Gold imports?

Experts who believe, investors will still find 8 percent offered for bank deposits as more attractive.
The present scheme will not bring out even 20 tonnes of gold.
Investors fear that the tax department will hound them questioning the source of gold.

Okay! But tell me how good are they from investing point of view?

A section of experts feels the interest rates being offered (on both deposits and bonds) are attractive.
For people who have gold as an investment asset, it is a good opportunity to gain some interest out of it.
Gold is always written off as a zero-yield instrument compared to equities, which give dividend and fixed income which gives fixed interest.

From now on, gold will not only be an instrument of security but will also give earnings and will become part of nation building.

Published with inputs from Arun