The sovereign gold bond initially introduced by the Government in 2015 has achieved only limited success, “mostly because of its unrealistic pricing pattern vis-a-vis the international price of bullion,” said James Jose, secretary, Association of Gold Refineries & Mints.
The Government introduced these bonds to help reduce India’s over dependence on gold imports, the move was also aimed at changing the habits of Indians from saving in physical form of gold to a paper form with Sovereign backing.
The Government announced a few changes in its Sovereign Gold Bond (SGB) Scheme recently. The primary change was the increase in the limit to 4 kg (from 0.5kg) for individuals, HUF and 20 kg for Trusts.
This was probably done to encourage high net-worth individuals, rich farmers as well as trusts to invest in these bonds.
The basic premise is that most Indians believe in gold as a time-tested and safe asset class and prefer it over other forms of investment.
Why change is need ?
Bullion prices are highly sensitive to international geopolitical tensions, U.S. Federal rates and dollar upswings. They move in a price band of 5-10% year on year.
Past SGB prices ranging from Rs. 3,150 per gm to Rs. 2,750 per gm was often not in parity with the market rate realities and this often led to the SGB consumers losing money, despite earning a 2.5% return on investments.
The pricing of SGB ideally should be the average of the bullion price of the 60 day-period preceding the issue date of SGB.
SGB has been moderately successful with the launch of eight tranches of these bonds since November 2015. However, the potential to scale up is huge. Keeping this in mind, the Government also introduced flexibility in the scheme to design and introduce variants to cater to a cross-section of investors.
Another factor diminishing the attractiveness of the SGB is its price being pegged to a 10% import duty, and any reduction in the import duty by the Government in the subsequent period would likely inflict severe loss of value to those who have already invested.
The Government should fix the pricing of SGB at bullion rates exclusive of import duty and IGST.
In case of physical delivery of bullion against SGB at a later date, import duty and IGST should be levied at the point of delivery. This will make the scheme much more attractive to the general public, thereby enabling substitution of expensive imports that impact the current account deficit (CAD).
To ensure further success, the Government should allow mass channels such as gold loan Non-Banking Finance Companies (NBFCs) to also market it.
Further, offering gold loan against Sovereign Gold Bonds would help popularise the product from a consumer angle.
For, it would then be perceived as being as liquid as physical gold. Over time, it would also help reduce various risk factors, such as spurious quality gold, and operational costs linked to manual assessment of gold for gold loan NBFCs.
The increase in the annual investment limit is likely to attract more investment from HNIs and trusts.