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Is Gold Losing Its Lusture ?

The total demand for gold in India dwindled by 35 percent in 2020 to 446.4 tonnes — lowest in the last 25 years — from 690.4 tonnes in 2019.

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India is a culturally diverse country and the demand for gold in India is intertwined with culture and tradition but another reason for investment is, it is considered to be the most secured form of investment as it is considered to be the instrument to hedge against inflationary condition and also known as the crisis Commodity. The year 2020 was a dreadful year not only for Indian economy but also for the world-wide economy. On the one hand where the crude prices were slashing drastically and touched the negative level on the other hand Gold was breaking the records.

In these dire times, everyone is anticipating a budget which can revitalize the Indian economy. To enhance the gold demand and boost the gem and jewellery sector which contributes around 7% to GDP of the nation, the honorable finance minister Smt. Nirmala Sitharaman has announced a slash in base custom duty from 12.5% to 7.5% but net implication translated to 10.75% including the agriculture infrastructure and development cess, and applicable social welfare surcharge.

Data Source: -Statista

The above graph shows the gold import of India from 2011. India is the highest importer of gold, but it leads to a current account deficit. Gold imports, which have a bearing on the country's current account deficit (CAD), fell 14.23 percent to $ 28.2 billion during 2019-20, according to commerce ministry data. Imports of the yellow metal stood at $ 32.91 billion in 2018-19. The decline in gold imports has helped in

narrowing the country's trade deficit to $ 152.88 billion against $ 184 billion in 2019-20. The country imports 800-900 tonnes of gold annually. To mitigate the negative impact of gold imports on the trade deficit and CAD, the government increased the import duty on the metal to 12.5 percent from 10 percent in 2019. Industry experts claim that businesses in this sector are shifting their manufacturing bases to neighbouring countries and due to the high duty and Gems and jewellery exports declined 11 per cent to $ 35.8 billion in 2019-20.

But in this year’s budget 2021-22, the base customs duty on gold and silver will be reduced to 10.75 percent after considering the cess and applicable social welfare surcharge.

This will surely have an impact on CAD as due to a fall in import duty it will lead to an increase in import and ultimately to a higher trade deficit. But it can also affect positively as the demand for domestic consumers will rise due to falling in price of gold which leads to growth in the gems and jewellery business and export also rises which fall approximately 72% in April-June 2020.

The sector is home to more than 300,000 gems and jewellery players, contributing about 7% to India’s Gross Domestic Product (GDP) and employing over 4.64 million employees. India’s gems and jewellery sector contributes around 15% to India’s total merchandise export. Growth in this sector will have a positive impact on our economy and this sector also helps to reach the level of 17% nominal GDP projected by Moody for the fiscal year 2021.

Data source -Thomson Reuters 

In the year of 2020 India’s CPI inflation for India remains high. In the starting of 2020 inflation was standing at a high of 7.59% i.e., above he limits of 6 % set by Reserve bank of India (RBI). According to the recent situation of the corona virus pandemic where inflation was increasing, then gold is always considered to be the best instrument to hedge against inflationary condition. According to Economics times data Rs 6,657 crore were infused in gold exchange-traded funds in 2020. In comparison, a net inflow of just Rs 16 crore was seen in the entire 2019. Assets under management of gold funds surged over two-fold to Rs 14,174 crore at the end of December 2020 from Rs 5,768 crore a year ago, data from the Association of Mutual Funds in India showed. Even the price of gold also set the mark of 56,000 per 10gms in the month of August 2020.

The rupee-dollar equation has a role to play in Indian gold rates although it does not impact global gold prices. Gold is largely imported and hence if the rupee weakens against the dollar, gold prices will likely appreciate in rupee terms. So, a depreciating rupee may dent the demand for gold in the country. However, remember the change in rupee-dollar rates has no impact on gold rates denominated in dollars

Data source :- IMF

The figure given below shows the Indian rupee exchange rate with respect to 1$.

In the month of April in year 2020 exchange rate touched a high of approx. Rs 76, which shows that Indian rupee is depreciating ad due to this the price of gold started rising. After the announcement of budget and reduction in corona cases the Rupee value stated appreciating and in relation to it the value of gold is also coming to a stable value.

Data source: -Thomson Reuters

According to the data given by Thomson Reuter's demand for gold for jewelry purposes is always high than in retail investment but in 2016 gold lost its luster and jewelry demand in India declined to a seven-year low in 2016. “In Q1 of 2016, the nationwide jewellers’ strike effectively shut down the gold industry. Further difficulties arose when the government’s clampdown on undeclared income – which reached its pinnacle in Q4 with the demonetization policy – drove an element of gold demand into

the shadier grey market” the world gold council said in a report. In the financial year, 2018-19 finance minister Nirmala Sitharaman increased the import duty on gold from 10% to 12.5% due to which the country's gold imports dipped about 3 percent in value terms to $32.8 billion in 2018-19 and simultaneously demand for gold falls. But according to the Reserve Bank of India data less gold import helped the CAD narrow to 0.9 percent of gross domestic product or $6.3 billion in July-September, 2019-20 from 2.9 percent or $19 billion in the same period of 2018-19.

The total demand for gold in India dwindled by 35 percent in 2020 to 446.4 tonnes — lowest in the last 25 years — from 690.4 tonnes in 2019. Even in 2019, it had fallen by about 9 percent year-on-year. In the year of 2020 according to Somasundaram PR, managing director for India at the World Gold Council said that Overall gold demand — which includes jewellery and investment — fell in the quarter ending September, but the decline was less severe than the 70% drop seen in the previous three months i.e. when there was stringent lockdown.

Data source: - Thomas Reuters

Max – Rs56,191 on 7th august

Min – Rs 38,400 on 16th march

Gold is also known as the crisis commodity and due to this reason, the gold prices in India shoot up to Rs 56,191 on 7th august 2020 when the coronavirus cases were also increasing at a very high rate. But as the situation started to come under control the price started falling and reach a level of Rs 49,060 on 29th January 2020 i.e. the last trading session before this year’s budget. After the reduction in the import duty to 10.75%, the gold prices fall to approx. Rs48000 on the 1st of February 2021 and reached a level of RS 47,474 on 12th February 2021 indicating a further decline in prices.

High Import duties attract increase level of smuggling, gold worth Rs 858 crore was seized across airports in the year 2019-20, the most in five years, the time when import duty rates were 12.5% So, with a reduction In import duty gold smuggling rate might fall in India.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Dr. Karunakar Jha

The author is Professor, Department of General Management, School of Business, UPES

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Upananda Pani

Assistant Professor, Department of Economics & International Business

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