New Delhi: After the turmoil in the stock market, the failure of another scheme is threatening the country’s gold reserves. Highly promoted at one time, today it has become a burden worth Rs 1.12 lakh crore.
Once acclaimed as a masterstroke similar to demonetisation, it is quickly turning into a similar blunder.
With the value of the rupee declining and mounting government debt, could this prove to be a costly mistake for the country?
We are talking about the sovereign gold bond (SGB) scheme. Launched in 2015 with much fanfare, it aimed at reducing the country’s gold imports while providing a decent investment opportunity to those seeking gold.
The idea sounded fine on paper. Instead of buying physical gold, the RBI issued gold bonds. Those who wanted to invest in gold could buy these paper-based bonds instead of actual gold.
The price of these bonds was linked to the price of gold. After eight years, you would receive the latest market value of that gold along with an annual interest of 2.5%.
No worries about storing these bonds in a locker or the risk of losing them.
There was a five-year lock-in period and the investment was free from capital gains tax.
The scheme was offered all over from banks to post offices multiple times in a year. In total, 67 tranches were issued.
Moreover, these bonds could also be traded in the secondary market. If you needed money, you could sell them to someone else without waiting for five or eight years.
Let’s understand with an example: Suppose in 2016 you bought ten grams of gold bonds. Back then, one gram of gold was priced at around Rs 2,800. In 2025, after eight years, the price of one gram of gold has reached Rs 9,000. Along with the 2.5% annual interest, your Rs 28,000 investment would now be worth Rs 90,000 – a nearly 200% increase.
Much better performance than any other stock or fixed deposit! A pretty tempting offer, right?
The RBI has not released exact data on how many people invested in these gold bonds. However, according to its 2024 annual report, Rs 72,274 crore was raised from this scheme – representing around 146.96 tonnes of gold.
Today, 132 tonnes of gold bonds are still held by investors.
Out of the 67 tranches, the government has only redeemed six so far. The remaining 132 tonnes are valued over Rs 1.12 lakh crore at today’s market price.
This year, the RBI has set the redemption price for the sovereign gold bond 2016-17 series IV at Rs 8,634 per gram.
Can the debt-ridden government really repay this much money? What was the thought behind launching this scheme? What was the actual idea behind it?
The government seems to have miscalculated that gold prices would remain stable, allowing it to raise funds at a low-interest rate. File photo: Pixabay/CC0.
Why did the government bring SGBs?
Indians have been obsessed with gold for centuries. This obsession forces India to import large quantities of gold. We import roughly 650-1,000 tonnes of gold per year.
When something is imported, payment for it has to be made in dollars. The government realised that a lot of dollars were flowing out of the country because of gold imports. Reducing gold imports would help preserve foreign reserves and stabilise the declining value of the rupee.
But did the government decrease its gold imports?
Instead, imports increased – from $34.32 billion in 2015 to $45.54 billion in 2024.
The government played around with import duties too. In 2019, the duty on gold imports was increased from 10% to 12.88%. Then in February 2021, it was lowered to 10.75%. In July 2022, it was raised again to 15%. Still, the demand for gold did not decrease. In 2024, the duty was reduced again to 6%, as per the New Indian Express.
Despite all this, gold prices kept rising and demand remained strong. While around 650 to 1,000 tonnes of gold are legally imported every year, smuggling remains rampant. A recent example is actress Ranya Rao, who reportedly made 30 trips to Dubai in a year, allegedly carrying 12-13 kg of gold each time.
In the 1970s, gold used to come from the sea; now it arrives by flight. Smugglers continue to find new ways.
The second reason for the SGB scheme was the need for government borrowings. The government regularly borrows money from the market and from investors – including ordinary citizens. The RBI only had to pay 2.5% interest, which is lower than a fixed deposit. The government likely assumed that gold prices would remain stable, allowing it to raise funds at a low-interest rate.
But the idea that gold prices would remain stable turned out to be a massive miscalculation. In 2015, ten grams of gold were worth Rs 26,300; today, they’re worth Rs 84,450. This became the biggest failure of the scheme. Instead of raising funds cheaply, the government now faces a massive liability.
Another goal was to formalise the gold trade. The government hoped that if more people bought SGBs, less gold would enter the informal market. This would reduce black money and hoarding.
But once again, gold prices played spoilsport.
Even demonetisation was meant to end black money – but you know how that turned out. In fact, immediately after the demonetisation announcement, around Rs 5,000 crore worth of gold was sold on November 8 and 9.
While the public was queuing up to buy gold from jewellers, who exactly was buying SGBs? Was this scheme also designed to benefit “friends” of the government? The RBI has not disclosed details about the bondholders or how many of them exist.
What about the Gold Monetisation Scheme?
Along with the SGB scheme, the government also introduced a Gold Monetisation Scheme in 2015. The idea was that people could deposit their household gold in banks and earn interest on it. The government had its eyes on not just household gold but also the massive reserves of gold held by temple trusts.
The World Gold Council estimated in 2023 that India held between 23,000 and 25,000 tonnes of gold. But the scheme failed – only 21 tonnes of gold were deposited in the eight years since the scheme began. The government underestimated Indians’ emotional attachment to gold. Monetising gold is not just difficult – it’s nearly impossible in this country!
Can Indian household gold be monetised?
Despite a modern liberalised economy and many investment options, Indians still trust gold the most. Gold at weddings is not just a symbol of wealth but a long-term investment. Even during the COVID-19 lockdown and demonetisation, people sold or pawned their gold to cover expenses. In times of crisis, gold has always provided security. People trust gold more than banks.
Economic hardship has forced people to take loans against gold. According to RBI data, gold loans increased by 71.3% in December 2024.
Meanwhile, central banks worldwide are hoarding gold. Between 2020 and 2024, the RBI bought 244 tonnes of gold. In the last quarter of 2024 alone, the RBI bought around 22.54 tonnes of gold. So it’s not just the public importing gold – governments are doing it too.
Seeing the surge in gold prices worldwide, some countries are now diversifying their foreign reserves. Take the US, for example – recently, Trump has created reserves of Bitcoin. What the future holds for cryptocurrency, only time will tell, but the future of gold remains bright.
With 61 tranches of SGBs still to be redeemed at current and increasing gold prices, the government’s liability remains a ticking time bomb. Meanwhile, the global economy is on shaky ground; even before US tariffs are to kick in, our exports are already down by 10.9% as of last month. Banks have reportedly written off loans worth Rs 16.35 lakh crore over the last decade!
Amidst this, would the government be able to handle this added liability of Rs 1.12 lakh crore?
Kavita Kabeer is a writer and satirist.
