Future of Sovereign Gold Bonds Scheme

The government will decide the future of the Sovereign Gold Bonds (SGB) scheme in September following the recent cut in gold import duty.

1. Key considerations include the high cost of financing the fiscal deficit through SGBs, which may lead to the scheme's discontinuation. The reduction in duty has led to a 5% drop in gold prices and increased demand, but it has also impacted investment returns. Initially aimed at curtailing gold imports, the scheme's continuation is now under review.
2. The government has reduced gross SGB issuances to Rs 18,500 crore and net borrowing to Rs 15,000 crore. The decision on new issuances will be made in September, with a focus on benefiting both investors and the government. Additionally, the government plans to issue Rs 20,000 crore worth of sovereign green bonds, closely monitoring the greenium.
3. A greenium is the difference in interest rates between Sovereign Green Bonds (SGrBs) and conventional Government-Securities (G-Secs). SGrBs are a type of government debt that funds projects that help India transition to a low-carbon economy.

The Status of the Gold Industry in India

Gold Reserves in India:

1. Total Reserves: According to the National Mineral Inventory, India has an estimated 501.83 million tonnes of gold ore reserves as of 2015.
2. Distribution:
   1. Bihar: Holds the largest share of gold ore reserves, accounting for 44%.
   2. Rajasthan: Comes second with 25% of the total reserves.
   3. Karnataka: Contributes 21% of the total reserves.
   4. West Bengal: Has 3% of the total reserves.
   5. Andhra Pradesh: Also has 3% of the total reserves.
   6. Jharkhand: Accounts for 2% of the total reserves.
3. Production: Karnataka is the leading producer of gold in India, contributing around 80% of the nation's total gold output. The Kolar Gold Fields (KGF) in the Kolar district is renowned as one of the world's oldest and deepest gold mines.

India's Gold Import:

1. Consumer Status: India ranks as the world's second-largest gold consumer.
2. Import Trends:
   1. 2023-24: Gold imports saw a significant increase of 30%, reaching USD 45.54 billion.
   2. March 2024: There was a notable decline of 53.56% in gold imports during this month.

What is Sovereign Gold Bond Scheme:

1. Launch: The Sovereign Gold Bond (SGB) scheme was introduced in November 2015. Its primary aim is to reduce the demand for physical gold and redirect domestic savings into financial savings. This helps in managing the country's gold imports and stabilizing the economy.
2. Issuance:
   1. Legal Framework: The bonds are issued as Government of India Stock under the Government Securities (GS) Act, 2006.
   2. Issuing Authority: The Reserve Bank of India (RBI) issues these bonds on behalf of the Government of India.
   3. Purchase Channels: SGBs can be purchased through various channels, including Scheduled Commercial banks (excluding Small Finance Banks, Payment Banks, and Regional Rural Banks), Stock Holding Corporation of India Limited, Clearing Corporation of India Limited, designated post offices, and stock exchanges like the National Stock Exchange of India Limited and Bombay Stock Exchange Limited. These can be bought either directly or through agents.
   4. Eligibility: The bonds are available for purchase by resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
3. Features:
   1. Issue Price: The price of SGBs is linked to the price of gold of 999 purity (24 carats) as published by the India Bullion and Jewellers Association (IBJA), Mumbai. This ensures that the bond price reflects the current market value of gold.
   2. Investment Limit: SGBs can be bought in multiples of one unit (1 gram), with specific limits for different investors. Retail (individual) investors and Hindu Undivided Family (HUF) have a maximum limit of 4 kilograms (4,000 units) per financial year. Trusts and similar entities have a higher limit of 20 kilograms per financial year. The minimum investment permitted is 1 gram of gold.
   3. Term: SGBs have a maturity period of eight years. However, investors have the option to exit the investment after the first five years, providing some flexibility.
   4. Interest Rate: The scheme offers a fixed annual interest rate of 2.5%, which is payable semi-annually. The interest earned on Gold Bonds is taxable according to the Income Tax Act, 1961.
4. Benefits:
   1. Collateral: SGBs can be used as collateral for loans, similar to physical gold.
   2. Tax Exemption: Capital gains tax on the redemption of SGBs for individuals has been exempted. This means that investors do not have to pay tax on the profits made from selling the bonds at maturity.
   3. Redemption: Redemption refers to the issuer (in this case, the Government of India) repurchasing the bond at or before maturity. This ensures that investors get their money back along with any interest earned.
   4. Capital Gain: Capital gain is the profit earned when the selling price of an asset, such as stocks, bonds, or real estate, exceeds its purchase price.
5. Disadvantages:
   1. Long-Term Investment: Unlike physical gold, which can be sold immediately, SGBs are a long-term investment. This means investors need to be prepared to hold onto the bonds for several years.
   2. Low Liquidity: Although SGBs are listed on exchanges, the trading volumes are relatively low. This makes it challenging to exit the investment before maturity, as finding buyers can be difficult.

What are Green Bonds:

1. Definition: Green bonds are issued by companies, countries, and multilateral organizations to exclusively fund projects that have positive environmental or climate benefits. These bonds provide investors with fixed income payments while supporting sustainable initiatives.
2. Government Plans: The government plans to issue sovereign green bonds worth approximately Rs 20,000 crore in the financial year 2024-25. This initiative aims to raise funds for environmentally friendly projects and promote sustainable development.

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