It is often the case that what’s good at the micro level is bad at the macro level and vice-versa. A subsidy that boosts a single sector or industry, for example, may distort broad allocations in an economy. Even inflation, which hurts household well-being, could be advocated at times as a way to reduce the burden of public debt. But there are exceptions and India’s Sovereign Gold Bond (SGB) scheme is one such. The government’s attempt to address a larger problem—Indian love of the yellow metal results in imports that often widen our current account deficit—has also helped address a micro problem: It has given us a relatively risk-free option to diversify our asset portfolios, while offering an attractive rate of return. It’s a win-win scheme by any yardstick.

It is often the case that what’s good at the micro level is bad at the macro level and vice-versa. A subsidy that boosts a single sector or industry, for example, may distort broad allocations in an economy. Even inflation, which hurts household well-being, could be advocated at times as a way to reduce the burden of public debt. But there are exceptions and India’s Sovereign Gold Bond (SGB) scheme is one such. The government’s attempt to address a larger problem—Indian love of the yellow metal results in imports that often widen our current account deficit—has also helped address a micro problem: It has given us a relatively risk-free option to diversify our asset portfolios, while offering an attractive rate of return. It’s a win-win scheme by any yardstick.

In November 2015, when Prime Minister Narendra Modi launched three gold-related schemes—the Gold Monetisation Scheme (GMS), Gold Coin and Bullion Scheme and the SGB one—not many were hopeful they would be an answer to our fascination with the metal. India has long and famously been the world’s largest consumer of gold, followed closely by China, though the two countries’ positions reversed in 2023. Earlier attempts to wean us away had largely failed and doubts were expressed about the 2015 package. “These schemes could help on the margin, but they do not address the underlying problem, which is households’ need for alternative assets for their portfolio diversification,” said Jahangir Aziz, then chief Asia economist, JPMorgan (and now its head of emerging market economies). These views were echoed by others as well. Fast forward to today. Sure, two of the schemes have not had much success. But SGBs have proved a winner. That too, by a long shot. The first SGB issued on 30 November 2015 matured in November 2023, giving investors a return of about 150% after taking into account annual simple interest of 2.75% (since reduced to 2.5%). To put that in perspective, the S&P BSE Sensex gave roughly the same return over that period. But here’s the icing on the cake: SGBs don’t just enjoy a capital-gains tax break if held to maturity, they are relatively risk-free. Since the time they were first issued, the price of gold has virtually been a one-way street. The first SGB was issued at ₹2,684 per gram and redeemed at ₹6,132 per gram. In contrast, the Sensex has been like a roller-coaster. Over the period from November 2015 to November 2023, it touched a low of 22,950 (February 2016) and a high of 67,840 (last September). It has been much the same story with subsequent SGB issues, making these bonds a much-sought-after asset class. Their latest issue in February 2024 saw residents subscribe to a record 12.78 tonnes of bonds worth ₹8,008.4 crore, or $966 million, the highest-ever amount since the scheme began. This is even though the issue price was a record high of ₹6,263 per gram. On 15 April, gold hit another peak of ₹7,463 per gram on the spot market.

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In November 2015, when Prime Minister Narendra Modi launched three gold-related schemes—the Gold Monetisation Scheme (GMS), Gold Coin and Bullion Scheme and the SGB one—not many were hopeful they would be an answer to our fascination with the metal. India has long and famously been the world’s largest consumer of gold, followed closely by China, though the two countries’ positions reversed in 2023. Earlier attempts to wean us away had largely failed and doubts were expressed about the 2015 package. “These schemes could help on the margin, but they do not address the underlying problem, which is households’ need for alternative assets for their portfolio diversification,” said Jahangir Aziz, then chief Asia economist, JPMorgan (and now its head of emerging market economies). These views were echoed by others as well. Fast forward to today. Sure, two of the schemes have not had much success. But SGBs have proved a winner. That too, by a long shot. The first SGB issued on 30 November 2015 matured in November 2023, giving investors a return of about 150% after taking into account annual simple interest of 2.75% (since reduced to 2.5%). To put that in perspective, the S&P BSE Sensex gave roughly the same return over that period. But here’s the icing on the cake: SGBs don’t just enjoy a capital-gains tax break if held to maturity, they are relatively risk-free. Since the time they were first issued, the price of gold has virtually been a one-way street. The first SGB was issued at ₹2,684 per gram and redeemed at ₹6,132 per gram. In contrast, the Sensex has been like a roller-coaster. Over the period from November 2015 to November 2023, it touched a low of 22,950 (February 2016) and a high of 67,840 (last September). It has been much the same story with subsequent SGB issues, making these bonds a much-sought-after asset class. Their latest issue in February 2024 saw residents subscribe to a record 12.78 tonnes of bonds worth ₹8,008.4 crore, or $966 million, the highest-ever amount since the scheme began. This is even though the issue price was a record high of ₹6,263 per gram. On 15 April, gold hit another peak of ₹7,463 per gram on the spot market.

The net result is that India’s economy has benefitted, as has the individual investor. The country’s import bill for gold today is lower to the extent that people are willing to hold SGBs instead of the actual metal, thereby reducing both our external sector vulnerability and our current account deficit. Meanwhile, retail investors can count on another asset class to diversify their holdings. Clearly, win-win solutions are possible. We should aim to find more of them.

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