New Delhi: The Union budget’s customs duty reduction for gold, and the resultant fall in the price of the precious metal, will reduce the amount the government will have to pay out on the Sovereign Gold Bonds (SGBs) coming up for redemption Monday.
However, the budget move has also meant that the government will earn much less from the tax it charges on the import of gold.
Additionally, gold sector analysts and market participants ThePrint spoke to said that the lower price of gold due to the duty reduction will increase the demand for future SGBs that are issued by the government.
That said, an analysis of the budget documents showed the government is looking to significantly scale back its SGB issuances. This is likely due to how expensive SGBs are for the government, with its liabilities growing by 780 percent over the past five years.
The government launched the SGB scheme in 2015, under which people could buy these bonds instead of physical gold. In return, they earned returns from this investment if the price of gold increased over the five-year minimum period they had to hold the bonds. The full maturity period for the bonds is eight years. In addition, they also earned interest at the rate of 2.5 percent on their investments, paid out every six months.
The price of gold at the time of payout was calculated as the average price of the precious metal on the previous three business days, as measured by the India Bullion and Jewellers Association (IBJA). This is where the customs duty reduction in the budget becomes a factor.
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Some savings for the government
Finance Minister Nirmala Sitharaman, in her 23 July budget speech, announced that the customs duty on gold would be reduced by about nine percentage points to 6 percent. Since almost all of India’s gold is imported, this had an immediate impact on the price of gold in the country, in turn impacting the amount the government will have to pay out on SGBs redeemed Monday.
On the day the budget was announced, the price of gold fell from Rs 72,609 per 10 grams in the morning to Rs 69,602 per 10 grams in the evening, a fall of 4.1 percent, according to IBJA data. While the price of gold recovered somewhat to Rs 70,392 per 10 grams by last Friday evening, it was still lower than the pre-budget price.
According to government data, the SGBs that are up for redemption Monday were purchased on 5 August 2016 at Rs 31,190 per 10 grams. After five years, 202 kg of the 2.95 tonnes initially purchased were redeemed, leaving behind 2.75 tonnes for redemption after eight years on 5 August 2024.
“The government might have to pay Rs 1,925.58 crore to the investors holding 2.75 tonnes of August series SGBs as per the current price of around Rs 7,000/gm,” Prithviraj Kothari, managing director of RiddiSiddhi Bullions Limited told ThePrint.
“If there had been no customs duty cut, gold prices would have been trading around Rs 7,600/gm, which would have led to an outflow of nearly Rs 2,090.65 crore (on the SGBs),” he added. “Therefore, the government would save around Rs 165 crore of liability in SGB redemption by reducing 9 percent customs duties on gold in the budget.”
Sriram BKR, senior investment strategist at Geojit Financial Services estimates that the government would end up paying 5-6 percent less on the SGBs than it would have had the customs duty cut not been implemented.
But substantial revenue given up, too
However, other analysis showed that the amount the government would save on SBGs was a relatively small sum when compared to the revenue it would lose because of the reduction in the customs duty on gold and silver.
“The government is projected to lose Rs 28,000 crore annually in revenue due to the Most Favoured Nation (MFN) duty reduction from 15 percent to 6 percent,” the think tank Global Trade Research Initiative (GTRI) said in a note following the budget. “This calculation is based on FY 2024 import levels, where India imported gold worth $45.54 billion and silver worth $5.44 billion.”
While GTRI did not estimate how much of this Rs 28,000 crore revenue foregone would be on account of the lower duty on gold itself, market participants have said this could amount to about Rs 15,000-18,000 crore every year.
Additionally, even though the amount received by the investors in the SGBs will be lower now than before the customs duty cuts, their returns would still be about 125 percent, not counting the additional interest they would have earned during the term of their investment, Kothari explained.
Lower gold prices could make SGBs more attractive
According to Geojit’s Sriram, people buy gold or gold bonds for one of two reasons: one is to diversify their investment portfolios, and the other is because they expect the price of gold to go up.
“Since gold prices have come down, the inclination would be to buy gold,” he said. “But there’s also not always this correlation. From the 58th series of the SGBs to the 67th, the issue price was elevated. However, these were also the tranches that received the most interest from the public.”
Kothari, too, agreed that if the government does issue fresh SGBs, “it will be very attractive for retail investors as the purchase price will be lower”.
But the government doesn’t seem keen on fresh SGBs
ThePrint’s analysis of the Union Budget documents showed that the government’s estimates on the amount it would receive from the purchase of SGBs in 2024-25 were lower than what it had initially budgeted for the year in the interim budget announced in February.
That is, while the interim budget had estimated FY25’s receipts from SGBs to be Rs 29,638 crore, this was slashed by 37 percent to Rs 18,500 crore in the full budget.
Since analysts expect the demand for gold to remain robust, especially as it serves as a safe haven investment during times of heightened economic uncertainty, this reduced revenue from SGBs would appear to be the outcome of the government issuing fewer gold bonds.
“The SGB framework, which began in November 2015, was intended to provide a secure and simple alternative to physical gold,” Kothari explained. “The sovereign gold bond is one of the most expensive tools for government borrowing. It is uncertain whether the government will issue new securities during the current fiscal year.”
Indeed, the budget documents showed that the government’s total liabilities on account of the SGBs ballooned from Rs 9,652.77 crore in 2019-20 to an estimated Rs 84,998.65 crore in 2024-25. That’s a 780 percent increase.
“With the exponential rise in gold prices and the government redeeming the bonds at market rates with a 2.5 percent interest rate, along with capital gains and a TDS exemption on the bonds, the centre may choose not to rely too much on this avenue for its borrowings,” Kothari added.
With one-third of the financial year completed so far, the government has yet to make any announcements on the issuance of fresh SGBs.
(Edited by Sanya Mathur)
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