Sovereign Gold Bonds: An expensive fiasco

Aimed at helping cut demand for physical gold, scheme reveals lack of foresight

Almost a decade after it was originally unveiled by the then Finance Minister Arun Jaitley in the Budget for 2015/16, the Union government has come to realise the folly of its grandiose scheme to reduce the demand for import of physical gold. Sixty-seven tranches of Sovereign Gold Bonds (SGBs) representing 146.96 tons of gold had been sold by the government via the Reserve Bank of India as of February 2024, since November 2015, with the exchequer raising Rs. 72,274 crore in the bargain.

For the first time since its introduction, the government has not raised a single rupee through Sovereign Gold Bonds (SGBs) this fiscal year. It has now admitted that the scheme turned out to be a “rather fairly high-cost borrowing.”

Figure 1: Sovereign Gold Bonds Scheme promotion

The Union Budget presented last month by Finance Minister Nirmala Sitharaman reflects this shift, with lower liabilities for SGBs in both the Revised Estimates for 2024/25 and the Budget Estimates for 2025/26—indicating the government is winding down the scheme.

Last year’s Budget had projected SGB liabilities at ₹69,999 crore in the Revised Estimate for 2023/24 and ₹84,999 crore for the fiscal year ending March 2025. However, the latest Budget cuts the 2024/25 estimate by 28.7% to ₹60,566 crore, with an even lower projection of ₹55,056 crore for 2025/26.

To understand the government’s miscalculation in introducing the SGB scheme, one must examine the price at which gold-backed units were initially sold and the final redemption cost borne by the government.

The first tranche, equivalent to 913.57 kg of gold, was sold at ₹2,684 per gram. However, by the time of redemption, the government had to pay a much higher ₹6,132 per gram—a significant jump.

As a result, an investor in this first batch of SGBs not only earned a 2.5% annual interest over the bond’s eight-year tenure (if held to maturity) but also enjoyed a 128% price appreciation on the underlying gold—all without paying any capital gains tax on the profit.

Figure 2: 10-year price chart of gold (Source: goldprice.org)

Gold imports were also not impacted as originally desired and with the government having reduced the customs duty on gold in the July 2024 Budget to 6% from 15%, gold import volumes witnessed a 16% surge to more than 800 tons in the first 11 months of 2024, compared with 689 tons in the January-November period of 2023, the World Gold Council reported in December.

With just six tranches of the SGBs fully redeemed so far and a seventh one due to mature in March, the government’s current outstanding bonds — equivalent to 132.16 tons worth of gold — is already at the gold price of Rs. 8,665 as on February 25, a total liability of at least Rs. 1.14 lakh crore (excluding the interest). With the upward trend in global gold prices showing no signs of abating and if anything only likely to steepen further given the heightened uncertainty in worldwide geopolitical and economic conditions caused by the new Donald Trump administration’s trade and foreign policy positions, the government faces a steep cost for its unhedged gold bond scheme.

The government’s belated realisation that the SGB scheme was proving a windfall only for investors in the bonds and coming at great cost to public finances is most evident in the RBI’s latest announcement of the April-September calendar for premature redemption of as many as 34 tranches of the bonds.

Still, even if all investors holding the SGBs were to participate in the premature redemption in the first half of the next fiscal year, the government would still be left holding 95.61 tons worth of gold based bonds that would amount to more than Rs. 82.840 crore based on current gold prices.

Like the Finance Minister’s still-born scheme to borrow overseas through the sale of foreign currency denominated sovereign bonds announced in her July 2019 Budget, the SGB scheme reflects poorly on the lack of planning in the Finance Ministry’s upper echelons. For a government so singularly focussed on reduction of outstanding public debt, it would be advisable for it to engage in wider consultations with outside economic and financial market experts before it unveils new products for sovereign borrowing.

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