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India’s penchant for Gold and its economic impacts

Nearly 10% of our import bill is spent every year on purchasing gold which results in a huge outflow of foreign exchange from India.

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The one commodity that never loses its shine and lures all Indians across all strata is glittering Gold. Since time immemorial, gold has been an important part of religious and cultural rituals in India. People buy and gift gold on every small or big occasion. Although it is a bit contradictory that Gold is regarded as a necessity as well as a status symbol and the safest investment. Hence, it is no wonder that fascination and reverence for gold are the same across every stratum and part of India.

Even Uncertainties caused by COVID and the economic turmoil did not slow down the pace and volume of gold purchases in India. The most popular festival in India is Diwali which is followed by a wedding season and Indian love to indulge in gold shopping during this time period. No-one associated with the gold industry wants to lose a pie of this huge gold shopping festival. The year 2021 witnessed a record high in terms of purchases.

As per the Economic Times report ‘India splurged a record $55.7 billion on gold imports in 2021, buying more than double the previous year’s tonnage of $ 22 billion. In volume terms, India imported 1,050 tonnes of gold in 2021, the most in a decade, and far more than the 430 tonnes imported in 2020’.

Nearly 10% of our import bill is spent every year on purchasing gold which results in a huge outflow of foreign exchange from India. Although imports are necessary in order to sustain the economic progress or maintain the living standards in the country, at the same time we should a little careful about the composition of imported items within the country.

The gold that we are importing generally gets deposited in the households, as the domestic consumption of jewellery is very high. If we consider the economic challenges being faced by India and compare them with the purchase of gold, we will find contrasting situations. Here we can understand that the foreign exchange needed to buy this much gold can be channelized towards purchases related to technological improvements and infrastructure investment in the country.

For understanding this problem on a deeper level, we should also have a look at the Balance of Payment situation in India. The current account of the Balance of payment represents the data related to imports and exports of the country.

Whenever a country imports more than its export it creates a problem of current account deficit. Over the last many years India has consistently faced the issue of a Current Account Deficit (CAD) caused by huge import bills. The above chart depicts the current account deficit problem in India. We can clearly observe that barring the year 2020, India has never been in a surplus position (During the Financial Year 2020 -21 India was mostly under lockdown, hence jewellery shops were mostly closed).

This highlights two major issues: first, we are exporting very less and the second is that we are importing too much, which is harming the economy in terms of a fall in the Rupee exchange rate and depletion of foreign reserves.

The heavy and avoidable burden of gold on India’s current account of Balance of Payment adds troubles for policymakers. Although the Government has tried to impose some restrictions in the form of duties that has not acted much as a deterrent factor. India already faces a huge crude oil import bill, which cannot be avoided keeping in mind the fact that our whole economy runs on this.

Gold Investment in India

It is estimated that around 23,000-24,000 tons of gold lie unused in households and religious institutions throughout the nation. Indians invest mostly in the form of jewellery and a small percentage in the form of coins and bullions. With the experience and little success from imposing the purchase restrictions on gold, the Government has shifted its focus towards tapping gold held within the country.

Since the year 2007, the Indian government has launched several policies which aim at promoting the digital gold investments in the country. The government also encourages loans on gold deposits as this will be a secured loan as well it may add to the Institutional deposits of gold.

A brief about the Government schemes

Gold Monetization Scheme (GMS) – This scheme was introduced by the Government of India in 2015. This is a great initiative to tap the gold which is lying idle in the households and institutes. Through this scheme, the government can convert and use some of the deposited gold for productive purposes as at the end of tenure depositors have the option to make the payment in gold or in cash.

Sovereign Gold Bonds Scheme (SGBS) – This scheme was also launched in the same financial year on November 5, 2015. The main objectives of the scheme were to reduce the demand for physical gold and shift a part of the gold imported every year for investment purposes into financial savings.

‘Make in India in Gold’ also aims at boosting exports of gems and jewellery. It requires the development of clusters, jewellery parks, and common facility centres which would assist the development of the MSME-dominated industry and further the cause of ‘Make in India in Gold in India’.

Gold Exchange Traded Funds (Gold ETFs) schemes have been launched by mutual funds companies, which aim at investing in gold, gold mining, and other related companies. This is also a very good option for the investors if they want to do passive investment in the gold with the expertise of a professionally managed fund.

Here we will also have to understand that in India gold demand especially rises during marriage and festival seasons, therefore replacing the demand for physical gold becomes even more difficult. All these schemes point toward the intention and orientation of the government towards regulating and promoting the healthy growth of the industry.

There are ample challenges before the government in channelizing the physical gold investment toward the digital one.
The gold industry in India is highly fragmented and unorganized and it creates many challenges before policymakers. The industry is mostly dominated by MSMEs or local jewellers who have a very devoted client base from generations.

The government does not have much data regarding the sales and purchases in these units due to tax evasion and very less paperwork done by owners. Customers also don’t care much about the papers as the trust level is very high. Bringing all stakeholders on the same page is a humongous task.

We all are aware that there is a limit to all-natural mineral resources and the sustainability of the planet is at stake due to greed and unnecessary exploitation of these resources. So, it is no longer only an economic but an environmental issue as well.

With a huge population base, it becomes all the more necessary to find alternative solutions and search for a business model, by which existing gold available within the country can be utilized for different purposes. It will make the capital available for other necessary development needs. India can benefit hugely if we are able to channel the investments toward the capital markets of the country. More investors in the capital markets will also drive more investment options in the domestic markets.

A rich and well-established capital market will play a key role in the Indian growth story and also drive businesses to dream and achieve big things.

References –
1. Https://economictimes.indiatimes.com/news/economy/finance/indias-spends-record-55-7-billion-on-gold-imports-in-2021-govt-source/articleshow/88684634.cms?From=mdr
2. Https://www.bloomberg.com/news/articles/2022-03-31/india-s-current-account-deficit-widens-to-near-decade-high

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