Sovereign Gold Bond / Gold Monetization Schemes

The government of India had launched two gold schemes in November, 2015 to reduce the demand for physical gold and shift the part of gold to financial savings; thus helping address country’s Current Account Deficit and fiscal deficit to some extent.

After two years, it is found that the schemes have not done well. Here is a brief review of everything about these schemes.

India’s craze for Gold

According to the World Gold Council, 25,000 tonnes of gold worth half of GDP is sitting idle in homes and temples of India. The reasons for craze for gold are obvious. Gold has proved to be a safe investment during the times of inflation. The liquidity of gold in the market also comes into play as a financial insurance. Gold having a finite value in terms of its weight or amount cannot be debased during years as against to currency whose value is determined by the market forces. This provides an insured liquid value of gold and makes it a very safe investment.

Government Schemes

There has always been a need to mobilize the private gold to boost the mainstream economy. Towards this, gold deposit schemes were thought to be good idea. However, success or failure of any scheme involving Gold depends upon various factors. First, such schemes should be attractive enough in terms of interest. Second, government ought to provide immunity to individuals who are willing to bring private gold into the market because generally private gold is unaccounted for.

In 2015, the two schemes were launched as follows:

Sovereign Gold Bonds

The key features of SGBs are as follows:

  • SGBs are issued by RBI on behalf of the Government of India.
  • Denominated in rupees and in grams of gold
  • Restricted for sale to the resident Indian entities only both in demat and paper form.
  • The minimum and maximum investment limits are 2 grams and 500 grams of gold per person per fiscal year respectively.
  • The rate of interest for the year 2015-16 was 2.75 per cent per annum, payable on a half yearly basis.
  • The tenor of the Bond is for a period of 8 years with exit option from 5th year onwards.
  • Exemption from capital gains tax is also available.
  • Redemption is made in rupee value equivalent to the price of gold at the time of maturity.
Gold Monetization Scheme

The key features of Gold Monetization scheme are as follows:

  • The persons can open Gold Saving Account in designated banks and anyone can deposit physical gold via BIS certified collection, purity testing centres (CPTCs). The minimum amount of gold thus deposited is 30 gms, no upper limit.
  • The gold is deposited for short term (1-3 years), medium term (5-7 years) and long term (12-15 years).
  • The gold thus collected is sent to refineries and banks have tripartite / bipartite agreements with refineries and CPTCs.
  • On maturity, one can get back the cash / physical gold for short term deposits and cash only for long term deposits.
  • For the year 2015-16, interest rates were fixed as 2.25 percent and 2.5 percent for the medium and long term respectively.
  • Tax exemption are same as those available under GDS 1999.

Performance So far

Both of these schemes did not give good results. Out of the 25000 tonnes estimated, these two schemes could not mobilize even 10 tonnes. Further, the scheme could mobilize most gold from temples only. Household have always rejected any scheme which talks about their gold.

The schemes failed for various reasons as follows:

  • Inherent reservations about such scheme in Indian psyche, people are comfortable with their physical gold and don’t wish to bring it out. Most gold is unaccounted also.
  • Government could not prepare operating guidelines for banks / refineries / collection centers. Banks were reluctant on two things. First, did not know how government would reimburse the interest; and how they know that jewelers enjoy more confidence than them as far as gold is concerned.
  • Banks did not find deposits less than 500 gm viable business.
  • A meager number of refiners (only 10) and gold collection centres (50) were licensed to accept gold.
  • Very low interest rates and very bad marketing.

Current Status and Revival

NITI Aayog is now taking suggestions on how to revive these schemes. One suggestion was that the government should involve jewelers because they have more confidence of consumers. Thus, BIS certified jewelers should be allowed to collect gold on behalf of the banks; and banks should accept their acknowledgement for opening and crediting the depositors accounts.

Recently the Union Cabinet has also give approval to revision of the Sovereign Gold Bonds (SGB) Scheme. They key change was that upper investment limit per fiscal year has been increased to 4 kg for individuals, 4 Kg for Hindu Undivided Family (HUF) and 20 Kg for Trusts and similar entities notified by the Government from time to time.