India’s High Gold Consumption Hurts Economy

A customer tries on a gold necklace inside a jewellery showroom in the southern Indian city of Hyderabad, April 11, 2012.
A customer tries on a gold necklace inside a jewellery showroom in the southern Indian city of Hyderabad, April 11, 2012.

In India, gold consumption has been on the rise in the last two years despite record high prices. The country’s appetite for gold is hurting the economy.

Gold, a good investment

Pallavi Menon is buying gold jewelry for her daughter’s marriage later this year. The high price is no deterrent. “The jewelry is the most important part of the trousseau, there is no way I can marry off my daughter without giving her a lot of jewelry,” she said.  

With an estimated 10 million marriages held a year in India, and gold considered a good investment option, sales of the yellow metal have been soaring despite record breaking prices. India, which imports all its gold requirements, bought nearly 816 metric tons of gold last year.

Controlling India's import bill

For the government that is a cause of worry. The steady rise in the price of gold and a weakening local currency pushed up the import bill for gold to a staggering $55 billion in 2011.  After petroleum products, gold accounts for the highest outflow of foreign exchange.    
To discourage consumption, the government recently doubled the import tax on gold to four percent.

Chief Economist D.K. Joshi with Crisil rating agency in Mumbai praises the step as a means of helping to control India’s import bill, which is now higher than its exports.

“Today I think what India faces is a situation where we run a high current account deficit and gold imports account for almost 80 percent of the current account deficit," he stated. "It is not a very productive way of saving. Also what we have seen is people have moved away from investment in financial instruments towards gold, so that is also not very healthy.”  

A 32 percent return

Analysts point out that high inflation in recent years and weakening stock markets have meant that gold has been yielding better returns than other investments.

The head of the World Gold Council in India, Ajay Mitra, says gold is seen as an attractive asset.

“Gold is also highly liquid in India and unlike in many other countries, gold is used as a collateral to secure personal loans, and it is available in the entire banking system in India," Mitra explained. "And finally gold has had a consistent performance. So if you have bought gold a year back, gold has given a return of 32 percent.” 

Not just jewelry

Efforts are now underway to utilize the 16,000 metric tons of gold estimated to be locked away in Indian homes. One fifth of that is in the forms of bars and coins.  

Mitra of the World Gold Council says they are exploring ways in which people could be encouraged to deposit these bars and coins with the government to earn an interest income. “Part of the solution that we envisage is with the gold that is deposited through the scheme, the government could lease out some of the gold to jewelers or find other mechanisms by which it could earn returns and that return would in turn be invested in capital for projects the government so desperately needs,” he said.

Sales of the yellow metal are brisk across both urban and rural areas, and even people with low incomes usually try to save to buy some gold.

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