Gold shines: on reducing India's demand for gold

Increasing access to alternative assets will help reduce India’s demand for gold imports

May 17, 2017 12:02 am | Updated November 29, 2021 01:19 pm IST

Prime Minister Narendra Modi’s long-drawn-out effort to tackle the desire for gold does not seem to be bearing fruit. India’s gold imports witnessed a huge jump in April, increasing threefold to $3.85 billion from $1.23 billion in April 2016. In March, the jump driven by jewellery demand was even higher as gold imports stood at $4.17 billion, compared to $974 million a year earlier. This suggests that Indian demand for gold is robust and that policymakers will have to continue worrying about its impact on the country’s trade deficit for a long time to come. The trade deficit in April was $13.2 billion, the highest since November 2014, compared to $4.8 billion in the year-earlier period. The 20% increase in exports to $25 billion was overcome by a 49% increase in imports, which stood at $38 billion. The jump in gold demand is particularly significant given the many steps taken to reduce it in recent years. For instance, the demonetisation of high-value currency notes last November coincided with India’s gold demand dropping to a seven-year low of 675 tonnes during 2016, according to the World Gold Council. Earlier, as part of his efforts to push Indians to decrease their gold purchases, Mr. Modi had introduced the gold monetisation scheme that aimed to reduce gold imports by using deposits to increase domestic supply. But, as of early 2017, the amount of gold that had been deposited under the scheme was less than 1% of overall gold demand in 2016.

It is no secret that Indians tend to favour gold over other income-generating financial assets. This has, for a long time, led to concerns about savings being wasted on a dormant metal instead of being invested in productive business activities. While such concerns may be valid, policymakers would do well by first tackling the issues that have explained the average Indian’s preference for gold. The metal’s predominant utility as a hedge against inflation, which protects the average investor lacking sophisticated financial acumen from a depreciating rupee, cannot be ignored. Ironically, the Centre’s sudden demonetisation decision has possibly undermined confidence in the rupee as a store of value, adding to the yellow metal’s attractiveness. Capital conservation is an important reason for investment in gold by Indian households. Gold’s lure cannot be explained only as a reserve for illicit wealth or tax evasion. Access to better and more formal financial market instruments remains a pipe dream for the majority in a country where talk of financial inclusion remains at the level of opening a basic bank account. Any significant strides on this front will require structural reform of the financial sector that encourages more competition to spur financial innovation and access. Until such time, gold is likely to remain a favourite asset, with gold imports adversely impacting India’s external trade balance.

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