Question map
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.
Explanation
The correct answer is option C (statements 1 and 3 only).
The Sovereign Gold Bond (SGB) is a substitute for holding physical gold[2], and one of its purposes is to make gold a productive asset by using its low interest rate as a financial tool to help[3] uplift the industry. This achieves the objective of bringing idle gold into the economy (Statement 1 is correct).
The craze for gold in Indians has led to a surge in import of gold in recent years and put pressure on BOP and external value of rupee[5]. Both the Sovereign Gold Bond Scheme and Gold Monetization Scheme were designed to address this issue by reducing the need for physical gold imports (Statement 3 is correct).
However, Statement 2 is incorrect. While 100 percent FDI is permitted under the automatic route in the gold sector[6], promoting FDI is not a stated purpose of these schemes. The schemes primarily aim to reduce physical gold demand and mobilize idle gold holdings, not to attract foreign investment in the gold and jewellery sector.
Sources- [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Sovereign Gold Bond Scheme > p. 267
- [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Sovereign Gold Bond Scheme > p. 267
- [3] https://www.niti.gov.in/sites/default/files/2019-06/Report_GoldMarket.pdf
- [4] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > begin{array}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c} > p. 490
- [5] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > begin{array}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c} > p. 490
- [6] https://www.niti.gov.in/sites/default/files/2019-06/Report_GoldMarket.pdf
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Scheme Objective' question. Standard economy texts (Singhania/Vivek Singh) explicitly link SGB and GMS to 'mobilizing domestic gold' and 'reducing imports' (CAD management). The trap lies in Statement 2: confusing a domestic savings instrument with foreign investment policy.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Is bringing idle gold held by Indian households into the economy a stated purpose of the Government's 'Sovereign Gold Bond Scheme' and 'Gold Monetization Scheme'?
- Statement 2: Is promoting foreign direct investment (FDI) in the gold and jewellery sector a stated purpose of the Government's 'Sovereign Gold Bond Scheme' and 'Gold Monetization Scheme'?
- Statement 3: Is reducing India's dependence on gold imports a stated purpose of the Government's 'Sovereign Gold Bond Scheme' and 'Gold Monetization Scheme'?
- Explicitly describes Sovereign Gold Bonds (SGB) as a substitute for holding physical gold — indicating a policy instrument to convert physical (household) gold into financial instruments.
- Notes issuance by RBI on behalf of the Central Government, showing this is a government-backed mechanism to absorb physical gold into the formal economy.
- Identifies a surge in gold imports and pressure on the balance of payments, then frames the Gold Monetisation Scheme (GMS) as the response to that situation.
- This linkage implies GMS aims to mobilize domestic/idle gold to reduce import dependence and relieve external sector pressure.
- Lists features and benefits of SGB (pricing, limits, demat holding), which support the idea that SGBs are designed to attract household gold into formal financial channels.
- Operational details (caps, RBI pricing) indicate a structured program to convert physical holdings into government/securities market instruments.
- Explicitly states the vision/purpose of the Sovereign Gold Bond Scheme (SGBS) as promoting digital gold, not FDI.
- Shows the scheme's aim is an alternative to purchasing physical gold, which is unrelated to promoting FDI.
- Defines the Gold Monetisation Scheme's purpose: to make gold a productive asset by monetising unutilised household and institutional gold.
- This stated objective focuses on monetisation and lending, not on attracting FDI to the sector.
- Discusses FDI levels in the gold sector and notes 100 percent FDI is permitted, providing context on FDI but not tying it as a stated purpose of SGBS or GMS.
- Shows FDI data is treated separately from the schemes' described objectives.
Contains an exam question that lists three possible purposes for the two schemes, explicitly including 'To promote FDI in the gold and jewellery sector' as option (ii).
A student could use this to suspect the claim and then check official scheme documents or government notifications to confirm whether FDI promotion is an officially stated objective.
Reiterates the three-item list (bring idle household gold into the economy; promote FDI in gold and jewellery; reduce dependence on gold imports), showing the idea appears in multiple study texts.
A student could compare multiple secondary sources and then seek primary sources (RBI/Finance Ministry scheme descriptions) to verify if FDI promotion is formally defined as a purpose.
Defines Sovereign Gold Bonds as a substitute for holding physical gold and describes their issuance mechanism—points to a financial instrument aimed at mobilizing domestic gold savings.
Using the fact that SGBs are financial substitutes for physical gold, a student could reason whether such instruments are designed to attract foreign equity into jewellery firms (FDI) or mainly to retain domestic savings, then check policy texts.
Lists features of SGBs (investment limits, RBI pricing, sovereign guarantee), emphasizing their investor-focused/financial-market nature rather than direct industry promotion.
A student could combine this with the definition of FDI (requires equity/corporate investment) to judge plausibility: if SGBs are retail bonds, they may be unlikely mechanisms to 'promote FDI' unless explicitly linked in policy.
Gives a concise description of FDI (sector-specific, involves company investment and management involvement), clarifying what 'promoting FDI' would entail in practice.
A student could use this definition to test the claim by asking whether SGB/GMS instruments create the typical channels (equity stakes, company-level investment) that constitute FDI, and then verify with scheme rules.
- Explicitly describes Sovereign Gold Bonds (SGB) as a substitute for holding physical gold — implying SGBs are intended to reduce demand for physical gold.
- Shows SGBs are government/RBI-issued instruments denominated in gold, offering a non-physical alternative to owning bullion.
- Links the 'craze for gold' and surge in gold imports to pressure on the balance of payments and then asks to examine merits of the Gold Monetisation Scheme — implying the scheme addresses import-related pressures.
- Frames Gold Monetisation Scheme in the context of reducing import-driven BOP pressure, indicating a purpose related to lowering import dependence.
- Lists features/benefits of SGBs (sovereign guarantee, demat holding, pricing tied to spot gold), reinforcing that SGBs are designed as an accessible alternative to physical gold ownership.
- Supports the inference that widespread uptake of SGBs can substitute for physical gold demand (and thereby imports).
- [THE VERDICT]: Standard Hit. Covered in major Economy primers (Singhania, Vivek Singh) under External Sector/BOP management.
- [THE CONCEPTUAL TRIGGER]: Balance of Payments > Current Account Deficit (CAD) > Measures to curb non-essential imports (Gold).
- [THE HORIZONTAL EXPANSION]: Memorize SGB nuances: 1) Eligibility (Residents, HUFs, Trusts, Universities), 2) Tenure (8 years, exit option after 5th), 3) Tax (Interest is taxable, but Capital Gains on redemption are exempt), 4) Collateral (Can be used for loans). For GMS: Minimum deposit (10g raw gold), Types (ST, MT, LT deposits).
- [THE STRATEGIC METACOGNITION]: When reading a scheme, define its 'Target Audience'. SGB targets *Indian Households*. FDI targets *Foreign Corporates*. A scheme for households cannot have 'Promoting FDI' as a primary purpose. This structural mismatch is your cue to eliminate.
SGBs are described as a direct substitute for holding physical gold, showing the scheme's role in shifting household gold into government-backed financial instruments.
High-yield for GS prelims/MAINS questions on government measures to manage commodity demand and savings behaviour. Connects to topics on financial inclusion, government securities, and household savings patterns. Learn scheme features (tenure, demat option, RBI issuance) and practice linking policy design to objectives.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Sovereign Gold Bond Scheme > p. 267
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > 8.12 Indian Economy > p. 268
The GMS is discussed in the context of surging gold imports and BOP pressure, highlighting its aim to mobilize domestic/idle gold to lower import reliance.
Essential for questions on external sector management and commodity policy. Connects balance of payments, import substitution, and mobilization of domestic resources. Prepare by mapping scheme objectives to BOP and fiscal/external sector outcomes and using case examples from the references.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > begin{array}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c} > p. 490
References connect household/ornamental gold behaviour, policy instruments (SGB/GMS), and balance-of-payments concerns driven by gold imports.
Useful for integrated answers bridging social behaviour (gold hoarding), macroeconomics (BOP), and policy (gold schemes). Frequently tested in mains for analytical essays; practice structuring answers that move from problem (imports/BOP) to instruments (GMS/SGB) to outcomes.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > begin{array}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c} > p. 490
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.11 Money Circulation > p. 57
SGB-specific details in the references (issuer, denomination, tenure, redemption and investor limits) are directly relevant when assessing scheme objectives.
Questions often ask about the design, objectives and investor protections of government bonds/schemes; mastering SGB features helps answer policy-purpose and scheme-comparison questions. Connects to broader topics on government securities, household savings mobilization and bullion policy. Learn by summarizing scheme facts (issuer, denomination, tenure, redemption rules, limits) and comparing with physical gold holdings.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Sovereign Gold Bond Scheme > p. 267
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > 8.12 Indian Economy > p. 268
Understanding what FDI means and how sectoral entry/approval works is necessary to judge whether a government scheme can legitimately claim 'promoting FDI' as an objective.
FDI concepts are frequently tested in economy/GS papers — definitions, difference from FPI, sectoral caps and automatic vs government route. This enables answering questions on policy aims (e.g., attracting foreign capital) and institutional constraints. Study by memorizing definitions, typical sectoral rules and approval routes; practice applying them to sectoral policy instruments.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 97
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > FDI IN AGRICULTURE > p. 323
SGBs are presented in the references as a government-issued substitute for holding physical gold, which is directly relevant to import-demand dynamics.
Frequently tested under schemes/policies in Economy: understanding SGB design explains how financial instruments can curb physical gold demand and impact imports/BOP. Master by linking scheme features (tenure, sovereign guarantee, demat) to policy objectives and practicing value-based question framing.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Sovereign Gold Bond Scheme > p. 267
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > 8.12 Indian Economy > p. 268
The evidence frames the Gold Monetisation Scheme as a response to import-driven pressure on the BOP, tying the scheme to reducing import dependence.
High-yield for UPSC Economy/Governance: connects commodity-specific schemes to macroeconomic indicators (BOP, rupee value). Useful for questions on policy rationale and evaluation — prepare by mapping scheme objectives to macroeconomic problems and practicing short analytical answers.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > begin{array}{|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c|c} > p. 490
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 6: Economic Planning in India > VII. Transforming India's Gold Market: > p. 148
The Tax Trap: While SGBs are attractive, the interest earned (2.5%) is fully taxable. However, the 'Capital Gains' arising on redemption are tax-exempt for individuals. This specific tax asymmetry is a prime candidate for a future statement.
The 'Instrument-Audience' Mismatch. Ask: 'Who buys SGBs?' -> Indian Residents. Ask: 'Who does FDI?' -> Foreign Entities. A scheme selling bonds to Indian residents cannot logically be designed to promote Foreign Direct Investment. Statement 2 is structurally impossible. Eliminate 2 -> Answer is (C).
Mains GS-3 (Mobilization of Resources): These schemes are not just investment products; they are macro-prudential tools to manage the 'Twin Deficit' problem. By financializing gold, the government reduces the import bill (CAD) and brings dead assets into the banking system (Liquidity).