Gold’s sun-like lustre drives every woman crazy. But Indians seem to have an insatiable lust for this yellow metal. No, history does not provide any evidence that gold was first discovered here. Yet this noble metal, with its myriad usage, has attracted Indians so strongly that they remain the world’s largest consumers of it.
However, there is one Indian who is not pleased with this fact — our Finance Minister Palaniappan Chidambaram who bears the tough task of containing our ballooning current account deficit (CAD) to 4.8 per cent of gross domestic product (GDP).
And why shouldn’t he be annoyed? According to figures released by the World Gold Council, yellow metal imports rose 120 per cent to 338 tonnes in the April-June period of the current fiscal (2013-14) from 153 tonnes in the same period a year ago. Jewellery demand was up 51 per cent in volume terms to 188 tonnes while investment demand was up 116 per cent to122 tonnes, putting upward pressure on the CAD which widened to 4.9 per cent of GDP at $21.8 billion against 3.6 per cent of GDP in the January-March quarter.
But what explains this ‘defying all logic’ demand for gold in the country? A decline in the value of gold in the month of April resulted in huge demand for the metal — and around two-thirds of the total demand is from jewellery segment.
Says World Gold Council India Managing Director Somasundaram P R: ‘In India people buy gold as a long-term investment to protect their wealth and millions of individuals across rural and urban India invest in gold as part of their household savings and not as discretionary spending for consumption. Gold stocks of over 20,000 tonnes in the hands of millions of households are a strategic asset for India and policy direction should be formed by this. Regardless of market sentiment, investors prefer investing in physical gold on auspicious days which are 20 per cent more this year compared to 2012. With the wedding and festive season in the last quarter of 2013, we believe that the demand outlook remains strong and the long-term fundamentals of the gold market remain intact.’
There are numerous factors given or known defining the insatiable want for gold. Cultural and social needs require parents to bestow their daughter with as much gold as they can at the time of her marriage. Societal pressure makes Indian parents start ‘hoarding’ gold ornaments the day the girl child is born.
But the penchant for gold in India is not restricted to women only. Superstar singer Bappi Lahri’s love for gold has never been a secret. Pune denizen Datta Phuge flashed the shimmering headlines in January 2013 after he splurged Rs 1.27 crore on a gold shirt for himself.
Hindu gods are not left behind in the race for gold. According to World Gold Council estimates, 2,000 tonnes of gold — worth about $84 billion at current prices — are stored in temples and have been offered by devotees to their ‘favourite gods’ in the form of jewellery, coins and bars. Well, all these remain cultural and individual factors behind the atypical demand for gold in India.
Kimberly Amadeo, author of Beyond the Great Recession: What happened and how to prosper, says. ‘Gold prices are a good indicator of how healthy the economy is. When the price of gold is high, that’s when the economy is not healthy. Investors flock to gold when they are protecting their investments from either a crisis or inflation. When gold prices drop, that usually means the economy is healthy. That’s because investors have left gold for other, more lucrative investments like stocks, bonds or real estate.’
Experts also explain the demand for gold as a product of the lack of transparency in our financial markets. The common man invests in gold to hedge against inflation as he or she finds it cumbersome to buy a financial instrument. Economist and advisor to KAASA Siddharth Shankar feels, ‘The investor is unable to understand market behaviour and that is the main cause for him to move out of the financial markets.
The markets have become large- player driven. Compared to buying jewellery, yes the hassles are more. But they are a necessary evil to ensure stability of the financial markets. Gold is also considered a safe haven that grows with inflation. It can be converted to cash at any point in time. There is no minimum limit to investment — a person can invest as little as Rs 15,000. The stock markets have been very bad and gold, thus, remains an option for anyone to invest in.’ There are other petty yet important factors, too, which remain unsolved. Loans extended by banks against gold are rising exponentially. According to an RBI study dated January 2013, outstanding loans by banks and non-banking financial companies (NBFCs) have grown from Rs 20,000 crore in March 2008 to nearly Rs 160,000 crore in March 2012 — at a compound annual growth rate of over 55 per cent. The study also observes that loans are taken for a short term — from three months to a maximum of one year at interest rates ranging from 12 to 24 per cent and amounting to 60-75 per cent of the value of gold pledged.
The majority of loans range between Rs 30,000 and Rs 80,000. They are taken for agricultural purposes, medical emergencies, to meet education expenses or on the occasion of marriages or deaths.
Gold loans are usually taken by farmers, sharecroppers, agricultural labourers, small traders and proprietors of small scale industries. This section of Indian society pawns its gold to meet its basic consumption needs. It is borrowing against gold as collateral because it does not have recourse to short-term credit otherwise. The increasing price of gold makes it more attractive to pawn even the small amount of jewellery people possess.
Researcher Kannan Kasturi, who prepared a report on gold imports, points out that traditionally gold demand has been entirely accounted for by jewellery, except for a small requirement from industry. In recent years, however, there has been a new international trend. Physical gold (in the form of gold bars and coins) has become popular as a form of investment starting from 2008, coinciding with the global economic crisis. Gold Exchange Traded Funds (ETFs) have been available in India since February 2007 and have seen rapid growth from 2009, with a nearly 10-fold increase between March 2010 and March 2013. According to WGC estimates, the investment demand in India has grown from about 16 per cent of total imports in 2003-04 to over 35 per cent in 2012-13.
Shankar explains, ‘The investor is intelligent. He can figure out where to invest on his parameters of risk and reward. I think banks must be held responsible for not letting credit flow to the small sector. I would say banks are at fault in encouraging gold buying. Had banks given credit to deserving small industries, money would have flowed into industry rather than gold.’
Given this fetish of the population, the government and RBI are going all out to curb inbound shipments of gold by announcing a slew of measures. The RBI has mandated that banks and nominted agencies musrt retain 20 per cent of every lot of gold imports in customs bonded warehouses. They will be able to import further gold only if they release 75 per cent of that stored gold for the purpose of exports. And the government increased the import duty on gold jewellery to 15 per cent and import tariff value of gold to $436 per 10 grams.
The many measures taken have indeed resulted in restricting imports to 12-15 tonnes worth $2.7 billion in the July-September quarter of FY14, at least officially. (The smuggling of gold has increased five folds in recent times.) On the recent Government controls, Somasundaram says ,‘We understand the short-term imperatives and acknowledge that a large current account deficit is unsustainable and needs to be checked. Reducing this innate demand for gold by restricting supply will not be effective in the long run.
Globally, India is the largest gold consumer and most of the demand is met via imports. We believe that gold can be part of the solution to the challenges that India faces and would like to see discussions about how best the existing and future stock of gold in India can be monetised, and work towards bringing capital into the financial system for productive purposes.’
Efforts are on to arrest the increasing demand of gold. What remains to be noted is that due to these controls, people are diverting their desire to silver with its imports estimated at 1,500 tonnes in the quarter ended September 2013 against 1,900 tonnes in the whole of the previous fiscal (2012-13). Will silver now become the ‘new gold’ in this historically gold -obssesed country?