Impact of Gold Import Duty Cut: Future of Sovereign Gold Bonds Scheme

What’s in today’s article?

• Why in News?
• India’s Gold Market
• Impact of Gold on the Economy
• Import Duty Cut on Gold
• Sovereign Gold Bonds Scheme (SGBS)
• Govt to decide future of SGB scheme in September

Why in News?

Following the Budget announcement to cut the import duty on gold, the government plans to make a final decision regarding the future of the Sovereign Gold Bonds (SGB) scheme in September.

India’s Gold Market

• The data on gold industry in terms of its’ size, direct contribution to GDP and employment, is not easily available.
• However, as per the World Gold Council report 2024:
  • India, along with China, topped the global demand for gold jewellery in 2023. Despite record gold prices, demand for jewellery remained strong in India.
    • Overall, gold demand in 2023 was 747.5 tonnes, down 3 per cent from 774.1 tonnes.
    • India remains the second largest gold jewellery consumer in the world.
  • India's central bank continued to be a significant buyer of gold, contributing to the global trend of substantial central bank gold purchases in 2023.

Impact of Gold on the Economy

• Business/employment opportunities:
  • Gold is used as a raw material for jewellery fabrication and making coins. This in turn creates business opportunities, value addition and employment.
  • The industry provides employment to a significant number of people in India, including miners, artisans, and retailers.
• Current account deficit (CAD): 
  • India is the world's second-largest importer of gold, which contributes to the country's current account deficit. 
  • The import of gold requires foreign currency, which puts pressure on the country's foreign exchange reserves.
  • It should be noted that the gold imports are also used for export of gold jewellery, it has the potential to mitigate the adverse impact of imports on CAD.
• Inflation: 
  • Gold is often used as a hedge against inflation, which means that during times of high inflation, demand for gold increases. 
  • This can lead to an increase in the price of gold, which can contribute to inflation.
• Savings and investments: 
  • Gold is considered a safe-haven asset and a store of value in India, which means that many people use it as a means of savings and investment.

Import Duty Cut on Gold

• In Budget 2024-25, the government slashed import duties on gold to 6 per cent from 15 per cent.
• While this duty cut led to a decrease in gold prices, it also resulted in increased demand for the metal.
  • The duty cut brought down domestic prices of gold last week to Rs 67,500 per 10 grams, their lowest in four months, from a record high of Rs 74,777 in early July 2024.
• Some analysts believe the customs duty reduction aims to curb gold smuggling, which has increased due to recent high gold prices.

Sovereign Gold Bonds Scheme (SGBS)

• About
  • The Sovereign Gold Bonds (SGB) scheme is an initiative by the Government of India, launched in November 2015. 
  • It offers a way for investors to buy gold in a paper or digital form rather than physical gold.
• Objective
  • The main objective of this scheme was to reduce the demand for physical gold and shift a part of the gold imported every year for investment purpose into financial savings.
• Issuance
  • Bonds are issued by the Reserve Bank of India (RBI) on behalf of the government.
• Denomination
  • Available in multiples of grams of gold, with a minimum investment of 1 gram.
• Interest
  • Investors earn a fixed interest rate of 2.50% per annum, payable semi-annually.

Govt to decide future of SGB scheme in September

• Future of SGB scheme to be decided in September
  • Following the Budget announcement to cut the import duty on gold, the government plans to make a final decision regarding the future of the SGB scheme in September.
• Reasons
  • As per the experts, the cost of financing the fiscal deficit through SGBs is quite high and does not align with the benefits accruing to investors from the scheme.
    • The Government of India finances its fiscal deficit through various instruments, including dated securities, the National Small Savings Fund (NSSF), provident funds, and SGBs.
  • This disparity may lead the government to decide on discontinuing the scheme at the upcoming meeting next month.
  • Also, SGBs were brought in as an investment (instrument) with a specific objective of curtailing gold imports and holdings. However, the recent customs duty reduction dampen demand for these bonds.
    • The reduction in gold prices following the customs duty cut has impacted returns on all gold investments, including SGBs, physical gold, and gold exchange-traded funds (ETFs).
• Budget 2024-25 and SGB
  • In the Budget presented on July 23, the government reduced the gross SGB issuances to Rs 18,500 crore from Rs 29,638 crore in the interim budget of February 1. 
  • Net borrowing through SGBs has been cut to Rs 15,000 crore from Rs 26,138 crore previously estimated.

Q.1. What is National Small Savings Fund (NSSF)?

The National Small Savings Fund (NSSF) was established in 1999 by the Government of India. It collects deposits from various small savings schemes, such as Post Office Savings, Public Provident Fund (PPF), and National Savings Certificates (NSCs). These funds are used to finance the government's fiscal deficit and support public welfare programs.

Q.2. What are Exchange Traded Funds (ETFs)?

Exchange Traded Funds (ETFs) are investment funds that are traded on stock exchanges, similar to stocks. ETFs hold assets such as stocks, bonds, or commodities and typically track an index, sector, commodity, or other assets. They offer investors diversification, flexibility in trading, and generally lower fees compared to mutual funds.

Source: After import duty cut on gold, govt to decide future of SGB scheme in September | RBI | NITI Aayog | The Hindu Business Line