The Sovereign Gold Bond (SGB) scheme, introduced by the Indian government in November 2015, is reportedly set to be discontinued by the financial year 2025-26. The scheme was originally designed to reduce the country’s reliance on physical gold and encourage investments in “paper gold.” However, recent developments suggest that the government believes the scheme has served its purpose and is no longer sustainable.
Sovereign Gold Bond (SGB) Scheme :
| Aspect | Details |
|---|---|
| Launch Date | November 2015 |
| Objective | Reduce physical gold imports, promote “paper gold” investments, curb trade deficit. |
| Issuer | Reserve Bank of India (RBI), Government of India. |
| Maturity | 8 years, with partial redemption after 5 years. |
| Interest Rate | Initially 2.75%, later reduced to 2.5%, paid semi-annually. |
| Taxation | Interest taxable, capital gains exempt if held till maturity. |
| Discontinuation Reasons | – Fiscal burden from liabilities and interest payments. – Focus on reducing debt-to-GDP ratio. – Shift to reducing gold import duties (15% to 6%). |
| Projected End Date | By 2025-26 |
Table of Contents
Purpose and Features of SGBs
SGBs were launched with the primary goal of curbing the import of physical gold, which places a significant strain on India’s trade deficit. Physical gold imports contribute to a rise in the current account deficit, and the scheme offered an alternative investment vehicle in the form of paper gold.
The main features of SGBs include:
- Maturity Period: Each bond has an eight-year maturity period, with partial redemption allowed after five years.
- Fixed Interest: Investors receive a fixed annual interest rate, initially set at 2.75%, later reduced to 2.5%.
- Gold-Equivalent Value: At maturity, the investor receives the market value of gold, providing an opportunity for both capital appreciation and interest income.
These bonds allowed investors to hold gold in an electronic or dematerialized form rather than physically, thus offering a safer and more efficient way to invest in gold. However, despite these advantages, no new SGBs were issued in FY25, even though Rs 18,500 crore was allocated for the scheme in the Budget. This is a sharp decrease from Rs 26,852 crore allocated in the interim Budget for FY24, indicating a shift in the government’s focus.
Why Is the Scheme Being Discontinued?
The government’s decision to phase out the SGB scheme is largely driven by fiscal concerns. One of the main reasons cited is the growing fiscal pressure from repaying the gold-equivalent value at maturity and making regular interest payments. The government’s commitment to reducing its debt-to-GDP ratio is also a key factor.
India’s debt-to-GDP ratio is projected to decrease from 58.2% in FY24 to 56.8% in FY25. As part of its fiscal consolidation efforts, the government is aiming to reduce the fiscal deficit to below 4.5% of GDP in FY26. The scheme, which has resulted in outstanding liabilities of around Rs 4.5 trillion as of March 2023, is seen as an additional burden that complicates these efforts.
The Reserve Bank of India (RBI) issued the last SGBs in February 2023, amounting to Rs 8,008 crore. Furthermore, early redemption options for SGBs issued between May 2017 and March 2020 have already been announced to ease the financial burden.
reasons for the discontinuation of the Sovereign Gold Bond (SGB) scheme:
| Reason | Explanation |
|---|---|
| Financial Burden | The government faces rising costs from interest payments and repaying the gold-equivalent value. |
| Growing Liabilities | As more bonds are issued, the government’s financial obligations increase, straining public finances. |
| Changes in Gold Policy | Reduced gold import duties (from 15% to 6%) have made physical gold more affordable, reducing the need for SGBs. |
| Focus on Fiscal Health | The government aims to reduce its debt and fiscal deficit, cutting long-term liabilities like SGBs. |
Changes in Gold Policy
As part of the FY25 Budget, the Indian government has taken additional steps to address challenges in the gold market. One of the key measures is a significant reduction in the gold import duty from 15% to 6%. This move aims to curb gold smuggling, which has been a growing issue in the country, and also makes gold more affordable for investors.
The reduced import duty reflects a broader shift in government policy away from the SGB scheme and towards more direct methods of managing the gold market. This policy shift may impact investor demand for gold, as cheaper imports could reduce the appeal of SGBs.
My Opinion
The Sovereign Gold Bond scheme was an innovative solution to reduce India’s dependence on physical gold while offering a secure investment alternative to the public. It played an essential role in addressing trade imbalances by encouraging people to shift from buying physical gold to investing in financial instruments backed by gold.
However, as India faces increasing fiscal challenges, the financial burden of repaying these bonds and paying regular interest has become a key concern. If the financial obligations of the scheme outweigh its benefits in the long run, discontinuing it is a necessary step. While it is prudent for the government to focus on fiscal consolidation, it is crucial to ensure that retail investors who have benefited from SGBs are provided with alternative, secure investment options.
Conclusion
The Sovereign Gold Bond scheme has played a vital role in India’s financial system since its inception in 2015. By reducing reliance on physical gold imports, it has helped curb the country’s trade deficit and has provided a safer, more efficient investment option. However, as the Indian government prioritizes fiscal discipline and the reduction of its debt-to-GDP ratio, ending the SGB scheme seems like a logical step.
While this may mark the end of an era for SGBs, careful planning and the introduction of alternative investment vehicles will be essential to ensure that investors continue to have opportunities to grow their wealth responsibly. The challenge for the government will be to balance fiscal consolidation with the need for accessible and secure investment options for the public.
