Leave out a tiny section of the truly emancipated of this country’s half the population living mostly in major cities, Indian women nurse an obsessive desire to adorn themselves with gold jewellery and go on piling on it. But is it only about exhibitionism or is there also an economic consideration, howsoever crude that may be driving gold acquisition at individual level? Besides the hedonistic pleasure women derive every time they acquire jewellery pieces, they do also swear by the much touted age old wisdom rooted in Indian tradition that gold should be considered a rainy-day fund.
Women’s craving for the yellow metal is no doubt the major demand driver for the precious metal. But at the same time, not a small section of wealthy Indians, irrespective of gender has found in gold a handy store of undeclared wealth. Almost every time the tax watchdog will conduct a raid, they will find gold with other valuables for which the source of income will perforce remain grey.
But such is the popular appeal of gold, particularly in China, the world’s biggest market for the metal, and India that the present high prices – $1,935 per troy ounce – triggered by Russian invasion of Ukraine and its negative economic fallout reflected in high rates of inflation is not proving to be a deterrent to demand.
“Well, some have definitely postponed buying jewellery waiting for the war to be over and see how gold prices move afterwards. In the near past, we found people abstaining from buying when gold prices climbed to a record ₹56,191 per 10 grams in August 2020. But they came back to whet their appetite and to make for the lost time when prices retreated to ₹43,320 in March 2021. I can tell you, this will be the case again,” says a spokesperson for West Bengal Bullion Merchants and Jewellers Association. Along with the spike in consumer demand, India ended up with record monthly imports of 177 tonnes in March last year riding on sharp price retreat.
Reacting to our gorging on gold in the fourth quarter of 2021 amounting to around 343 tonnes, the Economist of London writes tongue-in- cheek that this was “equivalent to the weight of five healthy Indian elephants every week.” Readers may be informed the Indian pachyderms come with a height of 6.6 to 11.5 feet and they weigh between two and five tonnes. A major concern for policymakers is that Indian craziness about gold is sustained by very high levels of imports, the miniscule domestic production meeting only a sliver of demand.
Moreover, when the common desire is to build on what they already have, recycling is mostly done by financially stressed families, especially when daughters are to be married off. Whatever progress the country might have made since Independence and whatever our claims to society treating women with respect, a bride’s happiness post marriage is linked to the dowry size, gold invariably being a major component of that. As an extension, gold as a wedding gift is much appreciated.
According to a study covering the five-year period 2016-20, imports had a dominant share of 86% of Indian gold supply, recycling 13% and mining 1%. Referring to the estimated mind-boggling Indian household gold trove of 22,500 tonnes worth $1.4 trillion, the Economist says this is five times the stock in America’s bullion depository at Fort Knox. As it would be, this humongous household stock and also the billions of dollar that the country spends to fund rising gold imports do not come for any productive purposes. Gold whose imports claim the second highest foreign exchange spending after oil and gas is a major factor of the current account deficit and adverse trade balance.
Over the years, an average Indian family has 11% of its wealth in gold against 5% in financial assets, not a flattering statement of economic wisdom. Unarguably, this will not be the case with citizens in any other country, developed or emerging. But is there any way New Delhi can curb the import of yellow metal, whose individual and family ownership is deeply ingrained in Indian culture and tradition?
Gold attracts customs duty of 7.5% but with other surcharges and GST, the total comes to 10.75%. Small mercy that the basic import levy was cut from 12.5% in the 2021-22 budget. But in the prevailing duty there is enough incentive for gold to be smuggled into the country through land, sea and air routes. It is difficult to make an estimate of the volume of gold traded in the grey market. Huge though it is. Some estimates that gold smuggled into the country would be valued around $12 billion. The basic rule is high customs duty emboldens smugglers to trade on a big scale as their risk taking capacity goes up.
Smuggling was negligible when the metal was inviting an import duty of 2% in 2004. But then in the hope of much higher revenue collection, the then UPA (United Progressive Alliance) government led by Congress unadvisedly raised the duty to 10% in 2013, which further went up to 12.5% in 2019 under the present NDA dispensation. Leading jewellers contend that customs duty cut off point should be 4%. Anything above that keeps the smuggling channels alive.
The Covid-19 pandemic leading to lockdown of retail outlets all over the country, postponements of weddings to better times and subdued purchases during Akshaya Tritiya, an auspicious occasion for both the Hindus and the Jains supposed to bring luck and prosperity underpinned tepid demand for gold in 2020. Imports as a result were only 430 tonnes for which the bill came to a modest $22 billion by Indian splurging standard. The health scare largely gone and life having returned to near normal by the final quarter of 2021, gold imports jumped to the most in a decade at 1,050 tonnes, according to official sources.
The volume and also the fact that the precious metal has become so much more expensive ensured the country spending a record amount of $55.7 billion to pay for 2021 imports. The previous record was $53.9 billion in 2011. Unfortunately, the bottom line here is spending so much on import of a non-essential commodity could only put pressure on rupee exchange rate, while the strong demand in China and India keeps gold prices high.
It is no brainer that jewelleries have the largest share of gold use in India. At the same time gold investment demand is rising. Economists will frown on gold imports of Indian size since it does not create value for the economy. But during the two-year long pandemic when jobs were lost and income of families shrank, people started pawning their gold assets for cash to overcome financial crisis that they thought would be temporary. That this is not the case is borne out by the failure of large numbers of borrowers to pay interest on money borrowed by pledging gold. At regular intervals, newspapers will run near full page advertisements of lending institutions putting jewelleries of defaulters on auction. An indication of fast spreading pauperisation of Indians.
