The soaring gold prices have brought a grim truth to sharper focus.
A decade after its launch, the government's Sovereign Gold Bond scheme (SGBs) has ended up as a classic case of escaping the bear and falling to the lion.
What started as a measure to reduce India's rising gold imports, ended up as an unforeseen fiscal burden on the exchequer, eventually forcing the government to strike it dead.
Compared to other debt instruments, the scheme may have offered lower borrowing costs for the government, but in the end, it left giant liabilities, which at current gold prices stand at an estimated Rs 1.12 lakh crore.
But wait. This isn't the final figure and as prices continue to mount with each clock tick, the Centre should perhaps stand ready with a blank cheque to pick up an even higher tab.
In other words, the scheme created a bigger fiscal hole than it was originally meant to solve.
Justifiably, the opposition charged that SGBs were a 'complete fiasco', much like demonetisation and the Make in India initiative. It even claimed that the government, having found that its bet on SGBs led to a staggering 930% increase in its liabilities, has been scrambling to contain the burden by reducing import duties on gold and racking out any new issuance of such bonds.
Launched in November 2015, SGBs are debt securities issued by the Reserve Bank of India (RBI) on behalf of the government, with each bond corresponding to a gram of gold. With a fixed interest rate of 2.5% per annum, payable once every six months, these bonds can be traded in the secondary market. The full maturity for the bond is eight years, with a five-year minimum holding period for investors. The last interest is payable on maturity along with the principal. On maturity, gold bonds are redeemed in Indian rupees and the redemption price is based on a simple average of closing price of gold of 999 purity of previous three business days from the date of repayment, as published by the India Bullion and Jewellers Association.
Traditionally, the yellow metal is considered as a safe port in a storm, so what went wrong? Turns out, almost everything.
The scheme was ill-designed in the first place without factoring in adverse price shocks, while the government kept tinkering with import duties to contain demand for physical gold. This was followed by black swan events like the global pandemic and the Russia-Ukraine war, all of which drove the scheme to be a devil's bargain with investors pocketing handsome gains at the expense of taxpayer monies.
As for the government, it's a cure worse than the ailment. The lure of lower borrowing costs of 2.5% interest to be paid on SGBs compared to 8%-9% paid on other debt instruments may have got the government hooked. But what officials didn't see coming is the baffling rise in gold prices as the government vowed to repay bondholders at the current price of gold and not the price at which the bonds were bought.
The assumption that the increase in gold prices will remain range bound was a Himalayan blunder, and to everyone's surprise, prices jumped uncontrollably from Rs 26,300 for 10 grams of gold in FY15, to about Rs 84,450 now.
Unbeknown of all that's to come, the government walked an extra mile to make SGBs attractive, hiking the maximum amount of bonds that people could buy, from 0.5 kgs to 4 kgs. It also waived capital gains taxes foregoing approximately Rs 3,200 crore revenue.
As SGBs became expensive, the government decided to discontinue the scheme clearly intimidated by the price tag. The most recent issuance of SGBs was in February 2024, marking the fourth tranche of the 2023-24 series and since then SGBs have been completely missing from the deck.
The scheme was designed to slow down gold imports, but they didn't.
Instead, they rose from $34.32 billion in FY15 when the scheme was launched to $45.54 billion in FY24. They stood at $37.4 billion during the first eight months of FY25.
On the other hand, government liabilities on gold bonds grew far faster than the income it has generated. According to estimates, liabilities ballooned from Rs 6,664 crore in FY18 to Rs 68,598 crore by FY24, a staggering 930%. For FY25 alone, the government initially projected liabilities at Rs 85,000 crore, which is nine times the number in FY20.
However, it's now revised to Rs 60,565 crore and liabilities are projected to fall further to Rs 55,000 crore in FY26.
So far, the government has fully redeemed six tranches of the bonds, but still has 61 tranches to be redeemed, with the final redemption happening only in February 2032. According to RBI's FY24 annual report, since inception of the SGB scheme, a total of Rs 72,274 crore (146.96 tonnes) has been raised through 67 tranches and investors still hold bonds worth 132 tonnes of gold, which at current market prices are estimated to be worth some Rs 1.12 lakh crore.
Some of the increase in liabilities was also due to government's own decision to tinker with import duties. First, it hiked duties in July 2019, from 10% to 12.88%, reduced them to 10.75% in February 2021, and increased them again to 15% in July 2022, anticipating that the move will make physical gold imports expensive and thus encourage buyers to load up gold bonds.
In July 2024, duty was again down to 6%. These import duty revisions, coupled with global uncertainties meant that the price of gold rose faster than the government had anticipated. And as the curtains come down, there is at least one big lingering question.
The SGB scheme did have a Gold Reserve Fund, but why was it designed so poorly to not even offset the price shocks it was originally meant to?
