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The Sovereign Gold Bond (SGB) scheme, launched in 2015 to discourage investors from purchasing more of the yellow metal, has ironically turned into a white elephant for the government by creating a significant fiscal burden. The government has so far issued ₹72,000 crore worth of SGBs between November 2015 and February 2024. While the first few tranches issued in 2015 and 2016 have been redeemed, SGBs worth 132,000 kg of gold are still being held by investors. At current market price, the government is looking at a liability of  ₹1.12 lakh crore. With a tenure of eight years, the last of the SGBs will complete their tenure in 2032. If the metal follows the past decade’s trend—when prices soared more than threefold—the government will face a much more massive liability than the currently valued one.
While the idea of weaning away the common man from buying the metal itself by offering an alternative avenue for investment was a good idea, the policymakers made two big mistakes—the bigger one being not buying gold as a backup to manage risks against the bonds issued. Instead, the proceeds of the scheme were used as borrowings from the public to fund the fiscal deficit. The second mistake was the promise of 2.5 percent interest on the SGBs on top of the capital gains accruing from the metal’s price appreciation. Now, with gold prices having surged a few times since the launch of the scheme, the cost of the borrowing for the government has gone up to double-digits compared to the 6-7 percent average cost for government bonds.
The government has, of course, realised the mistake and stopped issuing SGBs after February 2024, but the damage has already been done. In the current financial year, it has a total liability of over ₹60,000 crore due to SGBs. The next financial year, it is expected to be ₹55,000 crore. With uncertainty growing over global economic growth, gold prices are continuing to hit new highs. Unless they moderate over the next 5-8 years, the SGBs risk becoming a major fiscal headache for the government.
