DESPITE gold prices having plunged to five-year lows, demand for the yellow metal continues to remain strong in India, one of the world’s largest consumers. Gold sales usually start picking up towards the end of the four-month monsoon season ending September and reach their peak on the eve of the festive season a month later.

Internationally, gold is trading at five-year lows of below $1,100/ounce. Analysts expect it to fall below $1,000 over the next few months if the US Federal Reserve raises interest rates. Locally, gold is selling at below Rs25,000 (/10gm) and the markets expect prices to dip below Rs23,000 in case of a hike in US interest rates.

Unlike in many other countries, Indian consumers go on a buying spree when gold prices fall and do not wait for it to bottom out. A key factor influencing gold buying in India is the monsoon; a good rainy season augurs well for the gold trade, as farmers and other rural folk buy gold and jewellery. Rural India accounts for nearly two-thirds of gold demand.

Unlike many other countries, India’s consumers go on a buying spree when gold prices fall and do not wait for it to bottom out

India was expected to witness yet another bad monsoon this year, with the met office predicting ‘deficient’ rains. The India Meteorological Department last week once again stuck to its deficient monsoon prediction, maintaining the country would receive just 84pc of its long-term average during the second half of the season (August-September).

So far during the first two months of the season, India has seen an overall deficit of just 6pc in rainfall. But gold buying has been brisk, as lower prices for the yellow metal have lured millions of urban and rural consumers.

“Earlier, there was a concern of a drop in purchase in the first quarter (April to June) due to a weak monsoon,” said Somasundaram PR, managing director, World Gold Council (WGC), India. “But now, with the pickup in rains, I don’t see any reason to worry.”

Somasundaram expects demand for gold to be in the range of 900-1,000 tonnes in 2015, up from last year’s figure of less than 850 tonnes. Gold imports have risen sharply in the current fiscal. During April and May, India’s gold imports jumped by more than 60pc to 155 tonnes, following lower prices.

In 2014, India overtook China as the world’s largest consumer of gold; while gold consumption fell 14pc to 842.7 tonnes in 2014 (over 2013) in India, in China demand fell by 38pc to 814 tonnes, according to the WGC. Even in the April-June quarter, demand for gold in India outstripped demand in China.

But cheaper gold prices have helped India cut its import bill and also its current account deficit (CAD). In 2014-15, for instance, the CAD fell to 1.3pc of GDP from 1.7pc in the previous fiscal. This year, India’s gold import bill will fall by 18pc to $28bn — down from a peak of $54bn about two years — said Rajesh Khosla, managing director of MMTC-PAMP India Pvt Ltd, a joint venture between state-owned MMTC and the leading Swiss refiner.

THE insatiable hunger for gold in India has in the past led to a sharp increase in its CAD, forcing the government to impose a 10pc duty on imports of the yellow metal. Despite gold prices having fallen sharply, the government has not withdrawn the duty.

But the imposition of the 10pc duty has led to a surge in gold smuggling, especially from the Gulf and southeast Asia. In 2014-15, for instance, the customs department and the directorate of revenue intelligence seized about Rs11.2bn worth of contraband gold, up from the previous year’s seizure of Rs6.9bn.

While gold smuggling was rampant in the pre-liberalisation era before the 1990s — when the yellow metal would be smuggled in by boats — the 10pc duty on gold has led to a surge in smuggling by air.

Thousands of passengers flying in from the Gulf and southeast Asia are used as carriers by smuggling syndicates. Increasingly, the syndicates also use airline staff. Recently, the authorities arrested the crew members of two airlines, who had smuggled in gold from London, not a traditional source for smugglers.

But because of the strict vigilance maintained on passengers flying in from the Gulf and southeast Asia, the syndicates are experimenting with other routes, which are not so closely monitored.

The Indian government is also cracking down on what is emerging as a new racket by gold importers, who are exploiting the free trade agreement (FTA) that the country signed with the 10-nation Asean bloc a few years ago. Under the terms of the agreement, imports are allowed from the Asean nations at lower customs duties. Gold jewellery imported from Asean countries attract a duty of just 2pc, as against 10pc from other parts of the world.

The authorities suspect that some importers are violating the rules of origin specified under the FTA, which prescribe that there should be 35pc value addition in an Asean nation for a third-country product to be exported to India. Revenue authorities now insist on a bank guarantee from importers to weed out importers from third countries.

Besides avoiding paying higher duty, the increased import of jewellery from the Asean region is also hurting the domestic jewellery trade. So the government plans to curb gold jewellery imports at concessional tariffs.

India is also an exporter of gold jewellery, but lack of credible hallmarking of its products results in the country losing out on a lot of opportunities. According to the WGC, India’s annual gold jewellery exports could increase five-fold to $40bn in just five years if a credible hallmarking system is put in place.

“We estimate that exports could increase to at least $40bn from $8bn in 2013 and up to 2.5m jobs could be created by 2020, if local consumers, overseas buyers and financial markets could place their trust in the quality and purity of Indian gold,” said a WGC report. The council notes that many international buyers are wary of sourcing jewellery that is made in India, as they are suspicious about the purity of gold.

Though hallmarking is gaining popularity in India, less than a third of gold sold in the country is certified for purity, estimates the WGC.

Published in Dawn, Economic & Business, August 10th, 2015

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