Sovereign Gold Bonds On Way Out

'It has also outlived its initial purpose of reducing physical gold imports.'

With an increased emphasis on reducing government debt, the finance ministry is considering discontinuing the issuance of Sovereign Gold Bonds (SGBs) from the next financial year (2025-2026).

"The government is obligated to repay SGB investors the gold-equivalent value at maturity, which increases the government's liability. The regular payment of interest also adds to the government's fiscal burden. Now that the government has decided to sustainably bring down the debt-to-GDP ratio from FY27, there is no reason why such a scheme should be continued. It has also outlived its initial purpose of reducing physical gold imports," a senior government official said, requesting anonymity.

Finance Minister Nirmala Sitharaman is likely to announce details regarding debt reduction in the FY26 Budget. The Centre expects the debt-to-GDP ratio to come down to 56.8 per cent in FY25 from 58.2 per cent in FY24.

'The fiscal consolidation path announced in 2021 has served our economy well, and we aim to reach a deficit below 4.5 per cent next year (2025-2026). The government is committed to staying the course. From 2026-2-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of the GDP,' Sitharaman said in her Budget speech in July this year.

The government has not issued SGBs in FY25, though it has budgeted for Rs 18,500 crore (Rs 185 billion_ in the FY25 Budget, down from Rs 26,852 crore (Rs 268.52 billion) pencilled in the interim Budget of FY25.

The Reserve Bank of India last issued SGBs on February 21 worth Rs 8,008 crore (Rs 80.08 billion).

D K Srivastava, chief policy adviser at EY India, said the government need not get involved in a scheme like SGB.

"The price of gold in the international market is rising and may continue to rise. The overall idea that it need not be done in a way that adds to the government's debt is quite welcome," he added.

SGBs were launched in November 2015 to encourage retail investors to migrate from physical gold to paper gold.

SGBs have a maturity period of eight years at the then prevailing gold rate, which can be redeemed after the fifth year.

The investment limit was enhanced to 4 kg per financial year for individuals and Hindu Undivided Family, and 20 kg per financial year for Trusts and similar entities during 2017-18.

The interest is payable on the face value of the bonds at 2.75 per cent on SGBs issued in 2015-2016 and at 2.5 per cent on the SGBs issued in the subsequent years.

According to the latest data, the total issuance under the SGB scheme amounted to Rs 45,243 crore (Rs 452.43 billion) till FY23, with the outstanding amount increasing to Rs 4.5 trillion by the end of March 2023.

RBI announced an early redemption for SGBs issued between May 2017 and March 2020 in August this year to reduce the government's financial burden.

The FY25 Budget also reduced the import duty on gold from 15 per cent to 6 per cent, to check smuggling of the yellow metal.

Devendra Kumar Pant, chief economist, India Ratings & Research, said the scheme was introduced at a time when India's current account was not in good shape.

"The commodity, which was impacting the current account was gold," explained Pant. "Since the current account and fisc are in a relatively better situation now, if more physical gold is imported, they will be able to withstand it."

Feature Presentation: Aslam Hunani/Rediff.com