Yellow Metal Faces Challenge In Land Of Golden Sparrow

"India was known as the land of the golden sparrow because Indian merchants sought only gold from the rest of the world, which seemed to have an insatiable appetite for Indian textiles and spices," writes Devdutt Patanaik, in his book, Olympus.

With over Rs 2,500 billion worth of gold imports in FY 2020-21, it seems that our fascination with gold has not abated. Gold import was 7 per cent of the total imports by India from FY 2013-14 to FY 2020-21, according to data from the Department of Commerce statistics.

Challenges For Indian Gold Market

Interestingly, despite being the second-largest holder of the yellow metal, India’s per capita consumption of gold ranges between 0.3 gram and 0.6 gram per person, which is lower than average consumption in emerging markets like Vietnam (0.4 gram to 0.7 gram) or the middle East (1.2 gram- 2 gram) and developed economies like Germany (1.2 gram to 2 gram) and Switzerland (3.5 gram to 6 gram), according to a World Gold Council report, dated October 19.

Though there is a scope to raise gold’s per capita consumption, the yellow metal market is facing certain short-term challenges in the domestic market due to changes in the socio-economic landscape.

The World Gold Council report stated that "financial inclusion and financial literacy, while beneficial for India’s prosperity and income equality, have created challenges for the Gold market". The report highlighted how gold is facing unprecedented competition as an investment asset class due to changing investment and macroeconomic topography. 

Widening internet and smart phone penetration have increased discretionary spending on electronic goods and apparels and Indians are saving less than what they used to do, a decade back. Moreover, the bankable population in India has crossed over 80 per cent and more Indians are now saving money in banks’ savings account than buying gold as an investment option.   

As per World Bank Database, India’s saving rate has declined since 2010. Gross domestic saving as a percentage of GDP declined to 27.7 per cent in 2019 from 34.3 per cent in 2010. Declining saving rate is a challenge in boosting gold consumption as the yellow metal is a high-priced item. Also, rural income and monsoon have an impact on gold consumption as it has long been considered as the preferred form of investment in rural India. As per the report, wage growth in rural India has declined since 2011.

Moreover, decline in rainfall adversely affects rural income as 70 per cent of rural households are dependent on agriculture for their livelihoods.

Access to banking and ease of mobile transactions is also increasing consumers’ affinity towards other financial investments that can be done digitally from the comfort of one’s couch. Over 1 million new demat accounts get opened in India every month. Smartphones are also giving access to investment options through mutual funds and Equity purchases through various apps. Rising equities have propelled the urban mass to shift asset allocation from gold to equities.

A Costly Affair With Gold

India is the second-largest consumer of gold in the world but does not boast of any significant production, rendering our love for gold a costly affair. As per the report, consumer demand is primarily driven by jewellery, which makes up 77 per cent of the Indian annual demand. And gold jewellery, even while containing impurities that are essential for its manufacture, comes with an added cost  of 8-10 per cent, apart from taxes.

The cost involved in importing gold includes transportation, taxes and interests on loans from financial institutions. The imported metal is then smelted and processed further into lumps that can be transformed into consumable goods. Artisans work their magic to craft jewellery and accessories out of the chunks of this precious metal. Each of these creations must be novel, unique and in sync with consumers’ tastes to fetch value from the market. 

In an exclusive conversation with Outlook Money,  Somasundaram PR, regional CEO, India, World Gold Council, said, "The 8-10 per cent of making charges paid on gold jewellery is not actually ‘making charges’ but the extra cost incurred from importing to bringing it into the retail stores in a form that the consumer will buy."

The other forms in which physical gold is consumed, includes coins and bars. These forms, unlike jewelleries, do not involve the elaborate costs of smelting, designing and artisans. However, the other cost contraptions of imports apply to them as well.

Drivers Of Physical Gold Consumption In India

In India, gold jewellery is both a cultural adornment as well as an investment. Gold coins and bars, on the other hand, are long-term investments.

The consumption of coins and bars are mostly an urban phenomenon, while rural consumers prefer buying jewellery only, points out the Gold Council Report. Thus, the drivers of consumptions of the different formats of physical gold are very different. 

The report also states that jewellery demand is impacted more by short-term factors like inflation and rainfall, while the consumption of coins and bars depends more on long-term factors like per capita Gross National Income, levels of gold prices in Indian rupee terms and government levies.

As per the World Bank Database of February 2021, the percentage of people living in urban areas has increased from 19 per cent to 35 per cent between 1960 and 2019. During the same timeframe, agriculture’s contribution to India’s GDP decreased from 41 per cent to 16per cent. Thus, with increasing urbanisation and decrease in rural income, the demand for coins and bars is gradually increasing. It also implies that gold consumption in India will be impacted more by long-term drivers rather than short-term causes in future. This may also result in gold being perceived more as an investment and less as an ornament, as urbanization increases.

Is India’s Long-standing Passion For Gold Waning?

Demonetisation followed by Covid lockdowns has familiarised all classes of Indians with digital transactions and mobile payments. The government initiatives of doling out subsidies, health-insurance etc. through Aadhar-linked bank accounts has also resulted in more than 80 per cent bank account penetration.

One of the growth suppressants of gold consumption in India is increased financial transparency. With the majority of Indians owning a bank account, and increased digital transactions, mattress money has disappeared for a large section of Indians. The dwindling mattress money combined with GST regime and KYC norms for large-scale transactions has favoured gold consumption through the grey market.

As per Somasundaram, consumption of gold in pre-demonetisation years was on an average around 743 tonnes of gold annually, which has now decreased to around 550 tonnes. The transparency brought about by demonetisation and GST regime has boosted the grey market of gold in India, which reflects in reduced demand in organized distribution channels.

Somasundaram points out an interesting idiosyncrasy of retail customers regarding purchase of Gold ETFs and gold jewellery. He said that whenever the prices of gold are high, retail customers start investing in Gold ETFs and stop buying jewellery, and vice-versa. So, as an investment, gold does not lose its sheen, only the format changes from paper to metal and vice-versa.

Increasing urbanization, financial inclusion and financial literacy has probably shifted the perspective of gold jewellery consumers in India, if not the entire cohort of gold consumers. While gold is still viewed as a sound investment, gold jewellery may not be, if the trend continues.