The move is aimed at catering to the investment appeal of gold, even as it curbs import of the yellow metal which exacerbates the current account gap proble
New Delhi : With a view to curbing demand for physical gold, the government on Friday proposed to issue sovereign gold bonds, which may attract capital gains tax as is applicable to bars and coins.
The proposed scheme, which aims to shift part of the estimated 300 tonnes of physical gold bar purchased every year to demat gold bond, will be marketed through post offices and brokers on a commission basis.
Based on the current market price, issuance of gold bonds equivalent of 50 tonnes would be around Rs 13,500 crore, said a discussion paper on the scheme for which comments are invited till July 2.
“Since the amount is not very high, it can be accommodated within the market borrowing programme for 2015-16,” it said.
India, the world’s largest consumer of gold, imports around 800-900 tonnes of the metal annually, the second-biggest item after oil, leading to a substantial outflow of the foreign exchange. World Gold Council pegs India’s investment demand for gold at 180.6 tn, which formed 21.3% of total gold demand in 2014.
Gold imports grew 10.47 % to $2.42 billion in May. During April-May, the first two months of the 2015-16 fiscal, trade deficit stood at $21.39 billion as against $21.32 billion in the same period last fiscal. World Gold Council pegs India’s investment demand for gold at 180.6 tn, which formed 21.3% of total gold demand in 2014.
The issuance of these bonds would have to be within the fiscal deficit targets from the current financial year onwards, and can be accommodated within the market borrowing programme for 2015-16, as their estimated amount is not very high.
As regards returns on such instruments, it said, “The government will issue bonds with a nominal rate of interest (which will be linked to international rate for gold borrowing).”
“An indicative lower limit of 2 per cent may be given, but the actual rate will have to be market determined. On maturity, the investor receives the equivalent of the face value of gold in rupee terms,” it said.
The rate of interest on the bonds will be payable in terms of grams of gold, it said, adding that the interest will be 2 per cent or 3 per cent. Such bonds will be issued by RBI on behalf of the government and the issuing agency will need to pay distribution costs and a sales commission to intermediate channels, to be reimbursed by the government, the paper said. In order to ensure wide availability, the bonds will need to be marketed through post offices and by various brokers or agents who may need to be paid a commission (like for Kisan Vikas Patra).
Save up to $2 bn
Sovereign Gold bonds (SBGs) provide a good alternative for investors and if subscribed fully in the first year it will result in a saving of USD 2 billion on imports of the precious metal at current prices.
According to Japanese financial services firm Nomura, SGBs provide a good alternative for gold investors as these are sovereign backed and also provide a nominal rate of interest. “If the scheme is fully subscribed in the first year, then it will represent 27 per cent of the 2014 investment demand and would result in a saving of USD 2 billion on gold imports at current gold prices,” Nomura said.
In 2014, total investment demand for gold moderated to 180 tonnes from an average annual demand of 345 tonnes from 2010 to 2013, it said.
A key benefit from gold bonds is that an investor will not have to be worried about the quality of gold which is generally a big hurdle when purchasing gold from jewellers. This also makes it more fungible to be used as collateral by both lenders and buyers, India Ratings said in a report. India Ratings’ admits that it is unlikely that jewellery demand will come down anytime soon, but suggests that issuance of gold bonds by the governments may help wean investors away from physical ownership of the yellow metal. -PTI
