Gold Demand in India is Bound to Rise – Here Is Why
Gold demand in India has been slow to come back after falling sharply last year.
But, a revival back to 800-900 tonnes a year is on the cards for the country, said managing director at World Gold Council India.
Some blame the slump in gold demand on the Indian government’s continuous push for more transparency. Yet, WGC’s Somasundaram PR is convinced the effects are only temporary.
“Government in India is not anti-gold. It has two overall objectives: One is to increase the tax base, and the second is to promote transparency in trade and commerce,” Somasundaram told Kitco News in a telephone interview.
The government has passed numerous new laws in the last couple of years that might have discouraged some consumers from purchasing gold, Somasundaram said.
In the short-term, WGC sees gold demand staying around 650 – 750 tonnes in 2017.
“The demand will come back, but it could take one or two years before it is back up to 800-900 tonnes a year,” he noted.
Consumer purchases of the yellow metal tumbled down 22% to 674 tonnes in 2016, down from 863 tonnes reported in 2015.
During that time in India, one major change included the demonetization of all 500 and 1,000 rupee bank notes. “This helped to bring out a lot of cash people held as part of unaccounted wealth, but created a lot of issues in the process,” he noted.
Earlier, the government also made it public knowledge that only 2% of Indians actually pay income taxes. To address this, India implemented a law, forcing anybody who buys anything for more than $3,000 to provide their tax number.
The latest measure impacting gold buying has been the introduction of 3% GST tax that became effective on July 1 and aims to help with traceability of transactions.
These steps created a fear of buying gold, as people were too scared to give out their tax number, WGC India managing director said.
“I don’t think all the factors that affected demand in 2016 have completely been dissolved.
People are still hesitant to give their tax number for purchases, while cash purchases are still restricted,” he stated.
But, Somasundaram is “very optimistic,” believing that demand will come back and the gold market will be much better off with a more traceable and legal system.
“This drive is going to take gold out of the shadows of black money and help mainstream gold. Our view is certainly that trade will not have any option but to get more organized,” he said.
Accomplishing this won’t be an easy task, as India is still very much a cashed-based economy. A PwC report from 2015 showed that 98% of all transactions in India in volume terms were done in cash.
Plus, about 70% of gold in India is sold through an unorganized segment, head of the WGC India pointed out, adding that on average 10-20% of gold is being smuggled into the country illegally.
But, there are clear signs of improvement. In the last ten years, organized gold trade expanded from 5% to 30% in India, added Somasundaram.
Even before the GST tax was introduced this year, a lot of people saw the benefit of dealing with organized trade versus the illicit segment.
“Consumers were led to believe that they benefited by not paying a tax on gold, but smuggling channels were just lining their pockets. Whatever consumers thought they were saving in tax, they would lose in purity and price,” Somasundaram explained. “With the GST putting additional pressure on the trade system, consumers and traders will be left with no choice but to see the benefits of working legitimately.”
Here Is Why Gold Demand Will Rise
One of the major drivers for demand is the growing middle class and the popularity of gold jewelry during wedding seasons.
“India will be saving one third of its income and part of those savings will flow into gold. When incomes go up, gold demand also goes up. Also, 60% of jewelry demand comes from weddings. We have 10 million weddings every year on average. This is not going to go away in a country where more than 60% of its people are below the age of 25,” Somasundaram said.
Acceptability of gold in banking and financial transactions is also on the rise. “Gold as a means of collateral for a loan is one of the most accepted forms,” he said.
Another interesting fact is that the 250 million people currently living below the savings threshold in India will enter the middle class and become savers in the next five years, according to Somasundaram.
“One gram of gold per person translates into 250 tonnes,” he said.
Currently, total gold holdings in India equal to about 23,000-24,000 tonnes, which translates to about one trillion dollars. – Anna Golubova
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