What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’? 1. To bring the idle gold lying with Indian households into the economy. 2. To promote FDI in the gold and jewellery sector 3. To reduce India’s dependence on gold imports Select the correct answer using the code given below.
Contents17
- A1 only
- B2 and 3 only
- C1 and 3 only
- D1, 2 and 3
Show answer
Answer: (C) 1 and 3 only
Answer: (c) 1 and 3 only
Let's evaluate each statement about the Sovereign Gold Bond Scheme and Gold Monetization Scheme:
Statement 1 is CORRECT: Both schemes aim to bring the idle gold lying with Indian households into the economy.
India has an estimated 20,000+ tonnes of gold lying idle in households and temples.
The Gold Monetization Scheme allows people to deposit their gold with banks and earn interest, while the Sovereign Gold Bond Scheme offers government bonds denominated in gold.
Statement 2 is INCORRECT: These schemes are NOT designed to promote FDI in the gold and jewellery sector.
They have nothing to do with foreign direct investment.
Their focus is entirely on domestic gold holdings and reducing the need for gold imports.
Statement 3 is CORRECT: A major purpose of these schemes is to reduce India's dependence on gold imports.
India is the world's second-largest consumer of gold, and heavy gold imports widen the Current Account Deficit (CAD) and put pressure on the rupee.
By encouraging people to invest in 'paper gold' (gold bonds) instead of physical gold, the government aims to reduce the demand for imported gold.
Three gold schemes launched by PM Modi in 2015:
- Sovereign Gold Bond Scheme — government bonds priced in gold
- Gold Monetization Scheme — earn interest on deposited gold
- Indian Gold Coin Scheme — buy government-minted gold coins
Since statements 1 and 3 are correct, the answer is (c) "1 and 3 only".
India holds over 20,000 tonnes of idle household gold while being the world's second-largest gold consumer, creating a massive economic opportunity.
PM Modi launched three gold schemes in 2015 to tackle India's gold import burden which significantly worsens the Current Account Deficit.
The question tests whether students understand that these schemes target domestic gold mobilization and import reduction, not foreign investment promotion.
Sovereign Gold Bond Scheme
Indian Economy Sovereign Gold Bond Scheme
Sovereign Gold Bond Scheme: Paper Gold Alternative
Government bonds denominated in gold grams instead of rupees
Launched in 2015 to reduce physical gold demand
Earns 2.5% annual interest plus gold price appreciation
8-year maturity with exit option after 5th year
What is SGB
Sovereign Gold Bonds are government securities denominated in gold. Instead of buying physical gold, investors get a bond that tracks gold prices. Issued by RBI on behalf of the Government of India.
SGB vs Physical Gold
Feature | Sovereign Gold Bond | Physical Gold |
|---|---|---|
Storage | Demat form - no storage cost | Physical storage required |
Returns | Gold price + 2.5% interest | Only gold price appreciation |
Liquidity | Can sell on stock exchanges | Sell to jewellers/dealers |
Purity concerns | No purity issues | Purity verification needed |
Tax on maturity | Tax-free if held till maturity | Capital gains tax applicable |
Key Features
Minimum investment: 1 gram, Maximum: 4 kg for individuals per fiscal year
Issue price: Based on simple average of gold closing prices for last 3 days
Tradable on stock exchanges after 15 days of issuance
Collateral: Can be used as collateral for loans
Nomination facility available like other government securities
Trap: SGBs do NOT promote FDI - they target domestic gold demand reduction
Trap: Interest is 2.5% annually, not monthly or quarterly
Trap: Tax-free only on maturity - trading gains are taxable
Trap: Issued by RBI, not banks or mutual fund companies
Gold Monetization Scheme
Indian Economy Gold Monetization Scheme
Gold Monetization Scheme: Earning Interest on Gold Deposits
Deposit idle gold with banks and earn interest
Minimum deposit: 30 grams of raw gold
Replaced old Gold Deposit Scheme (1999) in 2015
Banks can lend this gold to jewellers and earn spread
How It Works
Individuals and institutions deposit their idle gold with banks. Banks test purity, credit gold value to depositor's account, and pay interest. Banks then lend this gold to jewellers who need it for business.
GMS Deposit Types
Deposit Type | Tenure | Interest Rate | Key Feature |
|---|---|---|---|
Short Term | 1-3 years | 0.5-0.75% | Simple interest, principal in gold/cash |
Medium Term | 5-7 years | 2.25-2.5% | Compound interest, flexible tenure |
Long Term | 12-15 years | 2.5% | Higher returns, lock-in period |
GMS Process Flow
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Gold Deposit**
Customer deposits minimum **30 grams** at Collection Centre`"]
s2["`**Purity Testing**
**Assaying** done to check gold purity and weight`"]
s3["`**Account Credit**
Gold value credited to **Gold Savings Account**`"]
s4["`**Interest Payment**
Banks pay agreed **interest rate** to depositor`"]
s5["`**Bank Lending**
Banks lend gold to **jewellers/refineries** at higher rates`"]
s1 --> s2
s2 --> s3
s3 --> s4
s4 --> s5Trap: GMS does NOT target FDI - focuses on domestic gold mobilization
Trap: Minimum 30 grams required - not any small quantity
Trap: Interest rates are much lower than bank deposits - around 0.5-2.5%
Trap: Replaces Gold Deposit Scheme 1999, not a completely new concept
India's Gold Consumption & Import Dependence
Indian Economy gold imports dependence
India's Gold Imports: Economic Impact & Policy Response
India is world's 2nd largest gold consumer after China
Gold imports contribute significantly to Current Account Deficit
Households hold estimated 20,000+ tonnes of idle gold
80-85% of gold demand met through imports
Economic Challenge
India's massive gold consumption creates a trade deficit as most gold is imported. Heavy gold imports worsen the Current Account Deficit (CAD) and put downward pressure on the rupee.
Gold's Economic Impact
Aspect | Impact | Government Response |
|---|---|---|
Trade Balance | Increases import bill significantly | Promote gold alternatives |
Current Account Deficit | Widens CAD, weakens rupee | Sovereign Gold Bonds |
Idle Gold | 20,000+ tonnes earn no returns | Gold Monetization Scheme |
Forex Reserves | Gold imports drain forex | Reduce physical gold demand |
Policy Objectives
Reduce import dependency: Shift demand from physical to paper gold
Mobilize idle gold: Bring household gold into productive economy
CAD management: Lower gold imports to improve trade balance
Rupee stability: Reduced import pressure strengthens currency
Financial inclusion: Provide gold-linked investment alternatives
Modi's 3 Gold Schemes (2015)
# Gold Policy Framework 2015
## Sovereign Gold Bonds
- Paper gold alternative
- 2.5% interest
- Government security
## Gold Monetization Scheme
- Deposit idle gold
- Earn interest
- Bank lending to jewellers
## Indian Gold Coin Scheme
- Government minted
- 999 purity assured
- Hallmarked coinsTrap: Gold schemes target import reduction, not FDI promotion
Trap: India is 2nd largest consumer, not largest (China is 1st)
Trap: CAD impact is key reason - not just household mobilization
Trap: All three schemes launched in 2015, not different years
FDI in Gold & Jewellery Sector
Indian Economy FDI gold and jewellery sector
FDI Policy in Gold & Jewellery Sector: Rules & Restrictions
100% FDI allowed in jewellery manufacturing under automatic route
FDI prohibited in trading of precious metals and stones
Gold schemes do NOT promote FDI - different policy objective
Retail trading in gold requires government approval
FDI vs Gold Schemes
FDI in gold sector is a separate policy area from domestic gold schemes. SGB and GMS target household gold mobilization and import reduction, not foreign investment attraction.
FDI Rules in Gold Sector
Activity | FDI Limit | Route | Key Conditions |
|---|---|---|---|
Jewellery Manufacturing | 100% | Automatic | No trading allowed |
Precious Metal Trading | Prohibited | N/A | Complete ban on FDI |
Retail Trading | Restricted | Government | Case-by-case approval |
Gold Mining | 100% | Automatic | Subject to mining laws |
Why Statement 2 is Wrong
Different objectives: Gold schemes target domestic issues, not FDI
No FDI provisions: SGB and GMS have no foreign investment components
Separate policies: FDI rules exist independently of gold schemes
Trading restrictions: FDI in gold trading is actually prohibited
Trap: Manufacturing vs Trading - FDI allowed in manufacturing, prohibited in trading
Trap: Gold schemes are domestic policy, not FDI promotion tools
Trap: 100% FDI in manufacturing doesn't mean unrestricted - no trading allowed
Trap: Government often links unrelated policies in wrong statement options