Metal to Paper: India’s Sovereign Gold Bonds

[The following guest post is contributed by Rishi A, a fourth year student of Hidayatullah National Law
The Government of India recently released
a concept
on Sovereign Gold Bonds. It has been proposed that these bonds would
carry a fixed rate of interest of around 1.5-2%, which can be further raised by
individual banks, and will be redeemable at the price of gold at the time of
maturity. The Government of India, through the Reserve Bank of India, has
proposed that it will issue these gold bonds, with the hopes of reducing the
rapidly increasing gold importing costs.
India consumes on average 1000
tonnes of gold every year, its second highest imported product is gold after
oil,[1]  and it is the world’s top gold importer.[2]
Hence, if implemented effectively, this proposal has the potential to
drastically bridge our Current Account Deficit.
Non-banking financial companies
(NBFCs) and Post Offices will be allowed to collect money and redeem the bonds
on behalf of the Government. These bonds are to be issued in denominations of
two, five and ten grams of gold with a minimum tenor of five to seven years.
This scheme is essentially being
proposed to convert the massive investment demand for physical gold into paper
demand. Speculating that a number of investors buy gold in forms of coins and
bars and store them in private safes as forms of investment, the government has
come up with this format, in which the investment will still be based on the
prices of gold but on paper. The Government aims to issue bonds worth 135
billion rupees or $2.12 billion or equivalent of 50 tonnes of gold in the first
year. It is also speculated that if this scheme is fully subscribed, it could
possibly result in saving $2 billion on gold imports at current prices.
But one downside to this could be
the tax related aspect. The report notes that there will be capital gain taxes
imposed on the bond which will be similar to the ones imposed on physical gold
purchases. This tax is mainly avoided by most of the Indian consumers, since
they typically buy coins and bars in cash.[3]
The biggest factors that the
Government will have to take into account to make this scheme attractive is not
just the fluctuating price of the metal but also the target group of this
particular scheme.
Firstly, price fluctuation is a major
concern that has to be taken into consideration. The SGBs will only be as good
as investing in physical gold if it provides the same return as the actual
metal would.
One of the major factors affecting
the prices of gold is its demand in countries like India and China.[4]
India individually accounts for approximately 30% of the global demand for
But with the recent import regulations placed by the Indian Government to curb
the massive current account deficit by restricting gold imports has led to a
decrease in the demand for gold. In 2014, India’s investment demand for gold
was at 181 tonnes against an average annual demand of 345 tonnes from 2010 to
2013. On the other hand, the jewellery demand for gold has increased from 613
tonnes in 2013 to 661.4 tonnes in 2014.[6]
According to the World Gold Council,
demand for gold in India fell 39% from a
year earlier in the quarter ended June to 204.1 tonnes. Investment demand —
buying of gold in the form of 
coins or bars rather than jewellery — plummeted
even further, losing 67%.
Furthermore, another factor that
largely affects the price of gold is the U.S. Dollar and the Interest rates of
the Federal Reserve in the United States. With the dollar performing better in
last few quarters against all currencies and with mounting speculations of a
hike in the interest rates by the Fed, the price of Gold is estimated to fall,
proving to be another concern to the Government’s proposed scheme.[8]
This loss in demand for gold, would
inherently in long term lower the prices of gold. Consequently, having invested
in gold with the hope to generate profit after the maturity period, falling
demand will only lead to a lower rate of return. More importantly, it is
pertinent to note that the investment demand for gold has been plummeting. This
could be a cause of concern as this is the sector that the Government wishes to
target with the Sovereign Gold Bonds.
Adding to this, the capital gains
tax that is speculated to be imposed on the return of investment, after the
maturity period, will further deter people from wanting to invest in the
Sovereign Gold Bonds. Therefore, the Government needs to provide concessions to
investors to incentivise the scheme and thus generate the momentum required.
Secondly, rural India accounts for
60% of the total gold consumption imported into the country.[9]
People here generally use their lives’ savings to buy gold, as a mode of
investment, especially for times of crisis or for weddings that have to be
its Vision 2020 document for the country, unveiled at the second edition of the
India International Bullion Summit organised by the India Bullion and Jewellers
Association, the World Gold Council
observed the importance of Gold in India not just a commodity to invest in, but
also a part of the Indian culture.
The Council observed that gold is
much more than just a precious metal. It is part
of the fabric of Indian culture and an inseparable part of its belief system.
For most Indians, gold is sacred; an embodiment of divinity and a symbol of
purity, prosperity and fortune that can adorn the body and celebrate life.[10]
another major challenge that the Government will face is convincing the rural
population, which constitutes a large part of the physical gold consumers to
shift from investing in physical gold to paper gold.
importantly, since it is the imports of the jewellery gold that has seen a
consistent rise, it is more important for the Government to show the people of
the country that investing in the Sovereign Gold Bonds is more profitable and a
better form of security as against gold jewellery.
The Government along with the
Sovereign Gold Bonds has also proposed the Gold Monetising Scheme, wherein, an
interested party can deposit their gold and they receive a return after the
maturity period with interest. The catch, however, is that the depositors are required
to melt their gold deposits and have them tested, whose costs have to borne by
the depositor.[11]
While this scheme is also largely
targeted at gold investors, considering the fact that investor demand for gold
is dropping and jewellery demand for gold is the one which seems to see no
limits, especially in a country like India, the Government must focus on
reducing the demand for jewellery gold. India is estimated to have more than
20,000 tonnes of the gold lying idle in its households. Even a portion of this
quantity will resolve a lot of problems faced by the country at this point of
time. For this, the Government must develop a method to convince the rural
population, the largest consumer of imported gold for jewellery, to seek
alternate forums of investment, like the ones promoted by the Government.
Rishi A

[1] Rajendra Jadhav and A. Ananthalakshmi, ‘India proposes gold-linked bonds to lower bullion imports’, 19th
June, 2015, available at:
[2] Kiran Sharma, ‘Modi
Government aims  to turn idle gold into
11th March, 2015, available
[3] Rajendra Jadhav and A. Ananthalakshmi, ‘India proposes gold-linked bonds to lower bullion imports’, 19th
June, 2015, available at:
[4] Annie Gilroy, ‘US Economic
Data and Other Factors Shaping Gold Prices Now’,
22nd May, 2015,
available at:
[5] Shenoy Karun, ‘3 Kerala
Companies have more Gold than Sweden, Singapore, Australia’,
December, 2014, available at:
[6] Sandeep Singh, ‘Gold
Monetisation Scheme: A 24-carat question, Interest Rates,
May, 2015, available at:
[7] ‘Has Gold become a bad
Investment in India?’,
18th August, 2014, available at:
[8]Reasons for the Recent
Decline in Gold Prices’,
9th December, 2014; available at:
[9] Sutanuka Ghosal, ‘Gold trade
to be hit by Indonesian imports, fall in rural demand’,
ET Bureau, 26th
May, 2015, available at:
[10] Shivom Seth, ‘World Gold
Council wants India to put idle Gold Stock to Use’,
7th Otcober,
2014, available at:
[11] Sandeep Singh, ‘Gold
Monetisation Scheme: A 24-carat question, Interest Rates,
May, 2015, available at:

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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