Sovereign gold bonds help save $3.3 billion in India's gold import bill

The government launched the first SGB in November 2015, and the first two issues have matured giving significantly high tax-free returns to investors

In 2023-24 (FY24), the Reserve Bank of India sold sovereign gold bonds (SGBs) worth 44.3 tonnes, marking the highest-ever response to the instrument since its introduction in November 2015.

In terms of value, with SGBs valued at $3.26 billion in FY24, it is expected to save 7-8 per cent of the country’s annual import bill for the precious yellow metal.

Experts suggest that this is an opportune time for the government to implement more measures to popularise SGBs and further reduce gold import bills, which have already reached $37.86 billion in the first 10 months (April-January) of FY24.

In the initial three quarters of FY24, about 648 tonnes of gold were imported. However, as global gold prices increased (from $1,800 levels in September 2023 to $2,180 levels currently), the influx of high-priced imports slowed, leading to lower demand and subsequently a higher discount of Rs 600 per 10 gram.

Estimating gold imports at around 800 tonnes in FY24, SGBs have saved 5.5 per cent of imports in quantity terms.

Shekhar Bhandari, president of Kotak Mahindra Bank, said, “The government should focus on converting demand for coins and bars into SGBs. Banks should be motivated to market SGBs as a push product rather than a pull product, making bond selling more lucrative.” He also supported allowing jewellers to promote SGBs.

The government introduced the first SGB in November 2015, and the initial two issues have matured, providing investors with high tax-free returns. Alongside bonds, the Gold Monetisation Scheme (GMS) was also launched but failed to gain traction.

So far, a total of 147 tonnes worth of SGBs have been sold, while the response to GMS is only 10 per cent of that. Both schemes aimed to reduce the import bill of gold, which has been exerting pressure on the rupee in the foreign exchange market.

In this context, the proposed electronic gold spot exchange may offer a solution to GMS and, in turn, contribute to savings on the gold import bill.

Surendra Mehta, national secretary of the Indian Bullion and Jewellers Association, said, “Electronic gold receipts (EGRs), tradeable on the spot exchange, can be a solution to convert idle gold held by households into a productive asset.”

Households can convert their gold investments into electronic receipts, similar to converting physical shares into dematerialised shares. These receipts can be traded on the exchange and reconverted into physical gold. Physical gold mobilised from these investors can also be lent to jewellers. Currently, banks import gold for lending to jewellers.

However, to make the gold spot exchange and EGR a reality, the issue of the goods and services tax needs resolution. Industry sources see this happening shortly as the government is currently seized of the matter.

To popularise SGBs, Mehta proposes a minimum bond size of 0.100 gram to attract more small investors. Additionally, making annual interest payable on SGBs at a tax-free rate of 2.5 per cent could be considered, with the possibility of reducing this interest to 2 per cent to offset any revenue loss to the exchequer. This approach aims to attract larger investors.

There has been a debate about whether investors in SGBs would have otherwise bought physical gold. However, the instrument has proven to be a successful investment avenue, offering tax-free returns ranging from 12.5 per cent to 13.5 per cent, depending on the investors’ tax breaks.

If SGBs are seen as contributing to curbing the gold import bill, it comes with its own costs.

“SGB has been an excellent instrument and has proven that gold can be monetised with the right incentives, showing immense potential. GMS should be reviewed from this perspective," said Somasundaram P R, India chief executive officer of the World Gold Council. He also believes EGRs can be a better option for monetising gold and bringing transparency to the industry.