Gold prices are rising on worries of global economic slowdown and US-China trade war. The government increased the customs duty on gold from 10% to 12.5%. While the hike in customs duty will enable the government to raise an additional Rs 4,000-5,000 crore of revenues, it will increase the domestic price of gold and revalue the entire stock of gold with Indian households by the same amount, according to an analysis done by Kotak Institutional Equities Research.
Given the fact that India is a big importer of gold—$33 billion, or Rs 2.2 lakh crore in FY19—the government needs to relook the market dynamics of Sovereign Gold Bond (SGB) Scheme that has received lukewarm responses from investors. In fact, India’s net imports of gold have exceeded FPI inflows by $100 bn over FY2011-19. The country has to rely on foreign capital to bridge the gap between savings and investment (CAD).
Since the first issue in 2015, a total of 28 SGBs have been issued; they have collected Rs 7,433 crore, translating to 25.3 tonnes of gold. In contrast, India’s gold demand in 2018 was 760 tonnes, of which jewellery demand alone was 598 tonnes. The success of the scheme will depend on its availability on tap, instead of limited tranches, or window for fresh sale, by the government. Pricing of the bond is a key element to attract buyers. At present, it is fixed on the average price of the last three days before the opening of the tranche. The issue price must be dynamic on the price at the bullion market on the day of the allotment of the bonds. Even for redemption, it must be the price of the day.