The soaring gold prices have cast a harsh light on the Indian government’s ambitious Sovereign Gold Bond (SGB) scheme, which was introduced in 2015 to curb the country’s rising gold imports. What was intended to be a smart financial strategy has now become a significant fiscal burden, leaving the government struggling to manage skyrocketing liabilities.
When the SGB scheme was launched, it seemed like a win-win situation. Investors could buy bonds linked to the price of gold while earning a fixed interest rate of 2.5% per annum. For the government, this was a way to reduce physical gold imports and manage the current account deficit. The bonds were backed by the Reserve Bank of India (RBI), with the promise that upon maturity, investors would be paid the prevailing market price of gold in Indian rupees. However, no one anticipated the dramatic surge in global gold prices that would follow.
At the time of the scheme’s inception, gold was priced at around ₹26,300 per 10 grams. Today, that figure has soared to approximately ₹84,450 per 10 grams. This unexpected surge has caused the government’s liabilities on these bonds to balloon from ₹6,664 crore in FY18 to a staggering ₹68,598 crore by FY24, a jaw-dropping 930% increase. Currently, investors hold SGBs equivalent to 132 tonnes of gold, valued at around ₹1.12 lakh crore. And with gold prices showing no signs of stabilizing, this liability is expected to rise even further.
The government’s strategy to manage the situation has been a series of inconsistent policy moves. Import duties on gold were raised in 2019 to 12.88%, lowered to 10.75% in 2021, hiked again to 15% in 2022, and then slashed to 6% in 2024. These fluctuations aimed to control physical gold demand while making SGBs more attractive. However, they only contributed to market volatility and did little to curb the rising gold imports, which increased from $34.32 billion in FY15 to $45.54 billion in FY24.
Adding to the challenge, the government offered significant incentives to attract investors, including waiving capital gains tax, which cost the exchequer approximately ₹3,200 crore in revenue. Moreover, the cap on the maximum amount of gold bonds an individual could purchase was raised from 0.5 kg to 4 kg, further increasing the government’s exposure to gold price fluctuations.
Despite the heavy losses, the government has managed to redeem six tranches of SGBs. However, there are still 61 tranches left to be redeemed, with the final redemption scheduled for February 2032. The latest issuance took place in February 2024, after which the government quietly halted the scheme, unable to bear the mounting costs.
The fundamental flaw of the scheme was its failure to account for extreme price shocks. While the government had established a Gold Reserve Fund to manage risks, it was poorly designed and insufficient to handle the scale of the price surge. Black swan events such as the global pandemic and the Russia-Ukraine war further exacerbated the situation, driving gold prices higher and turning the scheme into an expensive liability.
For the Indian government, the SGB scheme, once seen as a brilliant alternative to traditional debt instruments, has become a costly miscalculation. With liabilities now outpacing any potential benefits, the program serves as a cautionary tale on the dangers of underestimating global market forces. As the final chapters of this financial experiment unfold, the burden on taxpayers continues to grow, raising questions about the effectiveness of policy decisions that failed to foresee the golden trap that lay ahead.
