Know Why India Introduced Sovereign Gold Bonds
The affinity of Indians for gold has a strong cultural context to it, with almost all traditions having a place for the yellow metal. This love, though, poses an economic problem for the country. Know more about this.
India imports almost all the gold consumed in this country, which was worth $35 billion in the financial year ending in March 2023.
Gold imports have constantly pressured the country’s Current Account Deficit (CAD).
Recognising the economic implications of this trend, the government conceived Sovereign Gold Bonds (SGBs) as an alternative to physical gold, aiming to curb gold imports, reduce the CAD, and harness the domestic savings tied up in physical gold.
In the 2015-2016 Union Budget, the government made a significant stride in the financial sector by introducing the SGBs scheme.
This initiative was designed to navigate the country's investment trajectory from physical gold to 'digital gold.'
But what prompted this move, and how does it benefit the economy and its investors?
Here are the motivations and implications of this unique scheme.
- A Historical and Cultural Connection: India's profound cultural heritage has always been intertwined with gold, making it one of the world's largest consumers of this precious metal. This demand has traditionally been satisfied through imports, causing a substantial strain on the nation's CAD.
- Gold's Double-Edged Sword: Despite its limited domestic production, India's demand for gold continues to rise. While gold does not contribute significantly to the economy's productive capacity, it has certain desirable qualities such as risk protection, universal acceptance, and liquidity. However, the downside is that money spent on purchasing gold often gets blocked as it is not a productive asset.
- An Innovative Approach: The Indian government conceptualized SGBs as an innovative solution to these challenges. The aim was to curb gold imports, reduce the CAD, and unlock the domestic savings tied up in physical gold.
- Safety, Returns, and Convenience: SGBs, government securities denominated in grams of gold, offer investors safety and a steady return. They also alleviate concerns about storage and purity associated with physical gold.
- Tradeability and Tax Advantages: SGBs can be bought, sold, or traded on stock exchanges, making them easily accessible and liquidable. Furthermore, although interest on SGBs is taxable, the capital gains tax on redemption is exempted for individuals, making SGBs a more profitable investment option than physical gold.
- Implications of Rising Gold Imports: India is the world's largest gold importer. Despite high gold prices, the ever-increasing gold imports are a major factor contributing to the burgeoning trade deficit. This situation can potentially impact foreign exchange reserves and burden the external debt.
- A Significant Shift: The introduction of Sovereign Gold Bonds signifies a major shift in India's gold investment ecosystem. By promoting 'digital gold,' the government aims to bolster the economy by decreasing reliance on gold imports and offering investors a secure and rewarding investment option.
The Sovereign Gold Bonds scheme represents the government's strategic initiative to leverage the country's affinity for gold towards economic stability and growth.
It has successfully provided a safer, more profitable, and more convenient alternative to physical gold, transforming the gold investment landscape in India.
For those seeking safety, returns, and tax benefits, SGBs are a prudent addition to their investment portfolios.