The Modi government believed that people sought inflation protection and returns through physical gold purchases. It was also concerned about India importing 800-1,000 tonnes of gold annually, causing a significant drain on foreign exchange reserves. The idea was to offer an instrument that mirrored gold price growth, thereby weaning people away from physical gold.
SGBs assured to repay the gold purchased by investment made in SGBs at the gold price prevailing at redemption. It offered, in addition, an interest of 2.5 percent. Low initial demand and a modest rise of 1.94 percent per annum in gold prices during 2014-2017 (from Rs 28,007 per 10 grams to Rs 29,668) appeared to justify this design.
A more robust analysis of historical gold prices could have made the government see potential long-term risks.
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Gold prices (24 carat of .999 purity, for 10 grams, which SGBs proxied) in 1990s rose 3.24 percent per annum (from Rs 3,200 in 1990 to Rs 4,400 in 2000).
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In the next decade, gold prices increased by a very high annual rate of 15.44 percent (to Rs 18,500 in 2010).
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In the next four years (2010-2014), which preceded the launch of SGBs, gold prices increased by 10.92 percent annually. Over the 14-year period from 2000-2014, gold price inflation was quite high at 14 percent per annum.
Initial lack of investor interest led the government to believe SGBs were not attractive enough.
On 27 July 2017, it introduced measures to sweeten the scheme: individuals and HUFs were allowed to invest up to 4 kg per person, and trusts up to 20 kg. Commissions for agents and banks were also increased.
Still, there was no great enthusiasm for SGBs during the first five years from 2015 to 2020. Only about 31 tonnes gold-equivalent SGBs were subscribed.
A steady demand for SGBs emerged after 2020. Gold prices increased by 38 percent from Rs 35,220 per 10 gram in 2019 to Rs 48,651 in 2020. As it made SGB investments look great, more than 26 tonnes of gold was subscribed to in 2020-21 alone.
Prices remained elevated over the next three years, reaching Rs 65,330 in 2023. Subscriptions rose sharply to Rs 16,037 crore in 2020-21, followed by Rs 12,808 crore and Rs 6,148 crore in the subsequent years.
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