GS Paper III

News Excerpt:

During the fiscal year 2023-24, the Reserve Bank of India witnessed its highest-ever response to the sovereign gold bond (SGB) program introduced in November 2015, with sales amounting to worth 44.3 tonnes.

More About News: 

• In terms of value, With sovereign gold bonds (SGBs) valued at $3.26 billion in FY24, it is anticipated that these bonds could potentially save 7-8% of the country’s annual import expenditure on gold. 
• Experts suggest that the current period presents an ideal opportunity for the government to implement additional measures aimed at popularizing SGBs, consequently reducing the nation's gold import bills. 
• These bills have already surged to $37.86 billion in the first ten months (April-January) of FY24.

Rise in SGBs: In the initial three quarters of FY24, approximately 648 tonnes of gold were imported. 

• However, the escalation in global gold prices, rising from around $1,800 levels in September 2023 to $2,180 levels presently, resulted in a slowdown in the influx of high-priced imports. Consequently, this led to decreased demand and a subsequent higher discount of Rs 600 per 10 grams.
• Considering gold imports are estimated to be around 800 tonnes in FY24, SGBs have managed to save 5.5% of imports in terms of quantity. 

About SGBs: 

• Introduced in November 2015, the government's initial SGB offerings have matured, delivering investors attractive tax-free returns. 
• Alongside these bonds, the Gold Monetisation Scheme (GMS) was also launched but failed to gain significant traction. 
• So far, a total of 147 tonnes worth of sovereign gold bonds (SGBs) have been sold, while the response to the Gold Monetisation Scheme (GMS) is only 10% of that figure. 
• Both schemes aimed to alleviate the pressure on the rupee in the foreign exchange market caused by the import bill of gold.

Proposed reforms by Experts: 

• One of the reforms is the proposed electronic gold spot exchange may offer a solution to the challenges faced by Gold Monetisation Scheme(GMS) and, consequently, contribute to savings on the gold import bill. 
• Like electronic gold receipts (EGRs), tradable on the spot exchange, could convert idle gold held by households into productive assets.
• Households could convert their gold investments into electronic receipts, similar to converting physical shares into dematerialized shares. 
• These receipts could then be traded on the exchange and reconverted into physical gold. 
• Physical gold mobilized from these investors could also be lent to jewellers, eliminating the need for banks to import gold for lending purposes.
• However, to materialize the gold spot exchange and EGRs, the issue of goods and services tax (GST) needs resolution. 
• Industry sources anticipate progress on this front, as the government is currently addressing the matter.
• To boost the popularity of SGBs, experts proposed a minimum bond size of 0.100 gram to attract more small investors. 

Additionally, consider making annual interest payable on SGBs at a tax-free rate of 2.5%, with the possibility of reducing this interest to 2% to offset any revenue loss to the exchequer. This approach aims to attract larger investors.

Other Recomendations: 

• Recognizing the criticality and untapped potential of the gold market NITI Ayog formed a Committee on Transforming India’s Gold Market to recommend measures for Transforming the Gold Market Ecosystem in the country. 
• The Committee brought together diverse stakeholders from across the gold ecosystem, including representation from the concerned Ministries /Departments of the Government of India, RBI, industry associations and academia. 
• Some recommendations from the committee:
• To make gold mining more appealing to investors, there should be a focus on improving the ease of doing business through streamlined processes and single window clearances. Providing long-term risk capital for capital-intensive mining projects could attract more investment.
• Mining policies should include provisions for suitable exit options, and brownfield exploration should be considered. Enhancing the quality and accessibility of digital geological data is essential.
• Formulating a comprehensive taxation policy aligned with the strategic needs of the gold mining sector is necessary. Reducing duty on doré in line with import duty while increasing margins could promote domestic refining.
• Implementing responsible sourcing guidelines for refineries and establishing an 'India Good Delivery Standard' could improve transparency. Encouraging refining for exports and addressing restrictions on certain gold products could boost the refining industry.
• Enabling policy measures to boost exports and increase value addition, including incentives and inclusion in 'Make in India' industries. 
• Extending benefits to the gold industry through incentives like the Merchandise Exports from India Scheme (MEIS). Allowing the replenishment scheme for consignment export of gold jewellery to facilitate exporters. Exploring the possibility of creating a gold corridor between India and GCC countries.
• Enabling measures are needed to promote India as a refining hub to leverage its importance in global gold trade. Developing fair and transparent policies to enable courier agencies to distribute jewellery domestically and globally.
• Simplifying regulations regarding jewellery certificates to improve ease of doing business. Increasing the number of Assaying and Hallmarking Centers (AHCs) and improving infrastructure before making hallmarking mandatory. Implementing hallmarking in a phased manner to allow for infrastructure development and clearance of existing stock. 
• Developing regulatory frameworks for effective functioning and quality control of hallmarking centers.

Conclusion: 

There has been debate over whether investors in SGBs would have otherwise purchased physical gold. However, the instrument has proven to be a successful investment avenue, offering tax-free returns ranging from 12.5% to 13.5%, depending on investors' tax breaks. If SGBs are recognized for their contribution to curbing the gold import bill, it's essential to acknowledge the associated costs. Hence, SGB has been an excellent instrument and has proven that gold can be monetised with the right incentives, showing immense potential. GMS should be reviewed from this perspective.