Mains Paper 3: Economy | Mobilization of resources
The following things are important from UPSC perspective:
Prelims level: Read the tabular explanation of features of the Scheme. This increases scope for ample number of MCQs.
Mains level: Details of the Scheme
Sovereign Gold Bonds Scheme: 2018-19
- Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds-2018-19.
- The Bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange Limited.
Features of the Gold Bond Scheme
|1||Product name||Sovereign Gold Bond 2018-19.|
|2||Issuance||Reserve Bank India on behalf of the Government of India.|
|3||Eligibility||Resident entities including individuals, HUFs, Trusts, Universities and Charitable Institutions.|
|4||Denomination||Multiples of gram(s) of gold with a basic unit of 1 gram.|
|5||Tenor||8 years with exit option in 5th, 6th year and 7th year to be exercised on the interest payment dates.|
|6||Minimum size||1 gram of gold|
|7||Maximum limit||4 KG for individual, 4 Kg for HUF and 20 Kg for trusts and similar entities per fiscal (April-March) notified by the Government from time to time.|
|8||Joint holder||In case of joint holding, the investment limit of 4 KG will be applied to the first applicant only.|
|9||Issue price||Fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited for the last 3 working days of the week preceding the subscription period.
The issue price of the Gold Bonds will be `50 per gram less for those who subscribe online and pay through digital mode.
|10||Payment option||Through cash payment (up to a maximum of 20,000) or demand draft or cheque or electronic banking.|
|11||Issuance form||The Gold Bonds will be issued as Government of India Stock under GS Act, 2006.
The investors will be issued a Holding Certificate for the same.
The Bonds are eligible for conversion into demat form.
|12||Redemption price||In Indian Rupees based on previous 3 working dayssimple average of closing price of gold of 999 purity published by IBJA.|
|13||Sales channel||Banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices (as may be notified) and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange, either directly or through agents.|
|14||Interest rate||Fixed rate of 2.50 percent per annum payable semi-annually on the nominal value|
|15||Collateral||Bonds can be used as collateral for loans.
The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the RBI from time to time.
The lien on the bonds shall be marked by the depositary by the authorized banks.
The loan against SGBs would be subject to decision of the lending bank/institution and cannot be inferred as a matter of right by the SGB holder.
|16||KYC documentation||Know-your-customer (KYC) norms will be the same as that for purchase of physical gold.
KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required.
Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s).
|17||Tax treatment||The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961).
The capital gains tax arising on redemption of SGB to an individual has been exempted.
The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.
|18||Tradability||Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date, as notified by the RBI.|
|19||SLR eligibility||Bonds acquired by the banks through the process of invoking lien/hypothecation/pledge alone, shall be counted towards Statutory Liquidity Ratio.|
|20||Commission||Commission for distribution of the bond shall be paid at the rate Rupee one per hundred Rupees the total subscription received by the receiving offices and receiving offices shall share at least paise 50 per hundred Rupees of the commission so received with the agents or sub agents for the business procured through them.|
Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth
From UPSC perspective, the following things are important:
Prelims level: Domestic Council for Gold, Priority sector lending
Mains level: Role of gold in India’s trade balance & government steps to reduce its imports (Sovereign Gold Bonds etc.)
Govt sets up a dedicated gold council
- The Centre has decided to set up a Domestic Council for Gold to aid exports of jewellery
- This will also help in creating an ecosystem to harness the true potential for jewellery-making in the country
Structure of the council
- This council will represent all the jewellers of India who will be the electoral college
- They will form different interest groups and elect those who will sit in the council
- A Coordination Committee will be set up comprising senior officials of the Ministry and the gem and jewellery industry, who will meet monthly to ensure that industry concerns are addressed on priority
Tasks of the council
The council would work towards
- industry development
- job creation
- the building of regional clusters and
- strengthening of value chains
Exports not in PSL category
- Exports is a priority for India but not marked for priority sector lending for the banking sector
- The government has asked RBI to consider bringing exports in PSL category
Mains Paper 3: Resource mobilization
The following things are important from UPSC perspective:
Prelims: Not much
Mains level: This article is important as it highlights new development that is, commodity options trading in the gold on the Multi Commodity Exchange (MCX) and how it will benefit consumers.
- The Centre is taking steps for greater formalization of the gold trade with an eye on the future.
- In accordance with these steps, the country unveiled its first commodity options trading in the gold on the Multi Commodity Exchange (MCX).
- The gold option contract, with gold (1 kg) futures as underlying, expiring on November 28, 2017 and January 29, 2018 were made available for trading yesterday.
- As an introductory measure, no transaction fee is being charged on this product till December.
- This marks an important evolution in the trading of the yellow metal itself.
- Options trading hedge all risks for those dealing in gold.
- Given that Indians were big buyers of gold there are expectations that the new product would be extremely successful and with appropriate policy measures it will help formalize the gold trade.
How will consumers benefit from these steps?
- They are in consonance with the business environment for the future, the more it formalises, the better it is for consumers, jewellers and traders.
- The European-styled gold options are hedger-friendly and physically settled, which means on exercise at expiration, the options position develops into corresponding underlying MCX one kilogram gold futures position at the strike price of the exercised options.
- By hedging risk of rise in gold prices using ‘Gold Call Options Contract,’ a jeweller would not only be protected against price rise, but also would benefit from fall in gold prices.
- Similarly by hedging risk of fall in gold prices using a ‘Gold Put Options Contract’, a jeweller would not only be protected against price fall, but would benefit from rise in gold prices.
- Gold is the first product for options trading that SEBI had permitted after modern commodity derivatives trading started 14 years ago.
- The Finance Ministry had set up a committee for suggesting measures to transform India’s gold market.
SEBI and the integration of commodity markets
- There has been a very conscious effort by the government and SEBI to develop and integrate commodity markets in a phased manner.
- The introduction of options gives a strong impetus towards systematic development and transformation of commodity derivatives market in India, ushering in a new era in price risk management in response to stakeholder expectations.
- To further strengthen the market, a panel had been constituted in NITI Aayog to integrate spot and derivative market.
- The gold option is as an extremely low-cost product.
Options Trading in other commodities
- As per the SEBI rule, options trade is allowed in a commodity which has certain volumes in futures trade.
- Around 7-8 commodities like cotton, CPO, crude, silver, zinc and copper are there which also qualifies and after 3-6 months a decision will be taken to introduce options trading in them.
- News: The govt has announced the application window for the third tranche of the Sovereign Gold Bond scheme
- The bonds will be sold through banks, Stock Holding Corporation of India Ltd. and designated post offices
- Reason: It comes at a time when prices of gold are increasing
- Objective: To divert investment in the gold bonds instead of gold itself, which will help in reducing India’s substantial gold imports
Read more about Sovereign Gold Bond Scheme.
- The second tranche of the Sovereign Gold Bond (SGB) scheme has attracted applications for gold worth Rs.726 crore.
- The scheme is gradually picking-up amongst the investors with increase in awareness and more clarity about the provisions of the scheme.
- The idea behind the SGB scheme is to wean away those who use gold as a store of value.
- It encourages them to invest in the gold bonds as opposed to the yellow metal itself.
- The bonds are issued by the Reserve Bank of India on behalf of the govt.
The government plans to exempt capital gains made at the time of redemption of gold under the Gold Bond Scheme.
- Two schemes are the Sovereign Gold Bond Scheme and the Gold Monetisation Scheme.
- It could bring an estimated 20,000 tonnes of idle gold lying with Indian consumers into the economy and also reduce India’s dependence on gold imports.
- In Gold Monetisation Scheme, gold in any form can be deposited with banks for a period of one to 15 years. This gold will earn interest and redemption will be at the prevailing market value at the end of the tenure of deposit.
- Sovereign Gold Bond Scheme is aimed at customers looking to buy gold as an investment.
- While the gold deposited with banks under the monetisation scheme will be allowed to be sold to jewellers in order to boost domestic supply.
- Gold Monetisation Scheme is fairly a good move to reduce GoI India’s gold import.
- Under the scheme, either individual or institutions can keep their gold deposits with the bank and bank in-return gives them interest.
- The RoI (rate of interest) is yet to be decided, but experts say it should be around 5 to 6%.
- Similar scheme was launched in 1999 but could not yield the desired result due to inherent problems.
PM Modi Launches 3 Gold Schemes
In a bid to rein in the gold imports and attract investors away from physical assets, PM Modi launches 3 Gold Schemes:
- Gold Coin and Bullion scheme
- Gold Monetisation Scheme
- Gold Sovereign Bond Scheme
#1. India Gold Coin and Bullion scheme
- The coin will be the first ever national gold coin minted in India and will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side.
- Initially, the coins will be available in denominations of 5 and 10 grams.
- The Indian Gold coin is unique in many aspects and will carry advanced anti-counterfeit features and tamper proof packaging that will aid easy recycling.
#2. Gold Monetisation Scheme (GMS), 2015
- Scheme allows you to earn some regular interest on your gold and save you carrying costs as well.
- It replaced the existing Gold Deposit Scheme, 1999.
- It offers option to resident Indians to deposit their precious metal and earn an interest of up to 2.5 per cent.
Who can make deposits?
- Resident Indians (individuals, HUF, trusts, including mutual funds/exchange traded funds registered under Sebi norms) can make deposits under the scheme.
- No maximum limit for deposit under the scheme and the metal will be accepted at the Collection and Purity Testing Centres (CPTC) certified by the Bureau of Indian Standards.
#3. Sovereign Gold Bond Scheme
- Investors can earn an interest rate of 2.75 per cent per annum by buying paper bonds.
- Sovereign Gold Bonds will be issued in multiple tranches subject to the overall borrowing limits.
- The bond would be restricted for sale to resident Indian entities and the maximum allowable limit is 500 grams per person per year.
- They can be used as collateral for loans and can be sold or traded on stock exchanges
Few more things to know
- Minimum investment in the bond shall be 2 grams.
- The bonds can be bought by Indian residents or entities and is capped at 500 grams.
- The RBI has fixed the public issue price of sovereign gold bonds at Rs 2,684 per gram.
- The borrowing through issuance of Bond will form part of market borrowing programme of Government.
- The Bonds will be eligible for Statutory Liquidity Ratio (SLR).
Why was there a need for such schemes?
- To lure tonnes of gold from households into banking system.
- According to the World Gold Council, an estimated 22,000-23,000 tonnes of gold is lying idle with households and institutions in India.
- Huge gold imports pushed India’s current account deficit (CAD) to a record $190 billion in 2013, prompting the hike its duty on imports to a record 10 percent.
- The government wants to reduce the reliance on gold imports over time.
But, will these schemes succeed in bringing down Gold imports?
- Experts who believe, investors will still find 8 percent offered for bank deposits as more attractive.
- The present scheme will not bring out even 20 tonnes of gold.
- Investors fear that the tax department will hound them questioning the source of gold.
Okay! But tell me how good are they from investing point of view?
- A section of experts feels the interest rates being offered (on both deposits and bonds) are attractive.
- For people who have gold as an investment asset, it is a good opportunity to gain some interest out of it.
- Gold is always written off as a zero-yield instrument compared to equities, which give dividend and fixed income which gives fixed interest.
From now on, gold will not only be an instrument of security but will also give earnings and will become part of nation building.
Published with inputs from Arun