Sovereign Gold Bonds (SGBs) are financial instruments launched by the Indian government to provide an alternative to physical gold investment. While they offer numerous benefits to investors, they have proved costly to the government for several reasons.
Firstly, SGBs mandate annual interest payments to bondholders, typically around 2.5%. This recurring expense creates a significant outflow of funds, impacting the government’s fiscal budget. Additionally, fluctuations in gold prices pose a substantial risk. Bondholders are compensated based on the current gold price at maturity. If gold prices surge, the government must account for the increased payout, leading to potentially hefty expenditures.
Moreover, the administration of SGBs involves notable costs. Issuing, marketing, and maintaining records of these bonds require substantial administrative resources, diverting funds from other critical areas. These expenses, though not immediately apparent, accumulate over time to form a considerable financial burden.
Lastly, the opportunity cost cannot be overlooked. The funds allocated to support the issuance and management of SGBs could be otherwise invested in projects with potentially higher returns or more significant social impact, such as infrastructure development or healthcare.
In conclusion, while SGBs offer a secure and profitable option for investors, they impose multiple financial strains on the Indian government, making them a costly venture in the long run.