The Gold Bet That India Got Wrong

Picture Credit: forbes.com

In 2015, the Indian finance ministry thought it had figured out a clever strategy to both reduce the nation's unquenchable demand for gold while also borrowing cheaply.  Offering sovereign gold bonds (SGBs), which let investors earn a return correlated with gold prices without actually possessing the metal, was the straightforward plan.  Officials hoped that this would lessen the burden on India's current account deficit and cut down on gold imports.

 The idea appeared sound on paper.  Upon maturity, investors would receive the corresponding rupee value of their gold investment along with a small 2.75% coupon (later lowered to 2.5%).  The cost of borrowing for the government under this plan appeared to be much less than that of traditional debt at the time, when gold prices were steady and demand for safe-haven assets was dropping.

However, the gamble backfired spectacularly.  The price of gold has skyrocketed from about $1,500 per ounce in 2019 to $3,000 now, making SGBs an expensive burden on the government.  The first bond matured at more than double its issue price, making it an expensive borrowing tool.  In the meantime, the Indian public's passion for gold has not waned, as seen by the rise in yearly imports to an average of $37 billion during the previous ten years.

Picture Credit: greatandhra.com

The government attempted damage control by raising import duties to 15% in 2022, but this only inflated domestic gold prices, further increasing the government’s payout on maturing bonds.  Last year, in a last-ditch effort, it cut tariffs to 6%, but the damage was already done.  New Delhi is still responsible for 132 tons of gold, which amounts to a $13 billion debt as of last month.

 In the end, the sovereign gold bond program was a bold but unsatisfactory trial.  India's obsession with gold proved to be too powerful, and the government's wager against it ended up being an expensive blunder that taxpayers would have to pay for years to come.