Retail consumers unabated appetite to own an additional piece of gold has so far nullified the governments efforts to curb its import, in order to control the burgeoning current account deficit (CAD).
Indias gold demand surged 41 per cent in the fourth quarter of calendar year 2012. World Gold Council (WGC) data showed the countrys demand at 262 tonnes in the quarter, compared with 185.5 tonnes in the corresponding period previous year. Despite the governments four-fold rise in customs duty to discourage gold import, there was only a 12 per cent decline through 2012, at 864.2 tonnes, compared with 986.3 tonnes in the previous year.
Indias gold demand is largely driven by a combination of retail and urban consumers. While urban consumers are raising gold holdings in proportion to their rise in income, be it salaried or business class, continuous upward revision in the minimum support price (MSP) of agri commodities left more investible surplus at the hands of farmers. With gold only next to food and shelter, this investible surplus is coming into gold from rural India, said Umesh Parekh, managing director of Shree Ganesh Jewellery House Ltd.
In January 2012, when import duty on gold was less than one per cent, the government presumably thought an increase in tax would make the precious metal costlier, translating to an automatic reduction in consumers affection. It first doubled the duty to two per cent, on January 17, 2012, raising this to four per cent in the Union Budget in March.
Retail consumer demand comprises around 75 per cent of Indias overall gold demand. It remained intact, irrespective of import duty, said Parekh.
Retail consumers buy gold jewellery for gifting to kin, especially on weddings and other such celebrations. Gifting gold jewellery to children is extrmely widespread. And, young and enthusiastic investors buy gold coins as safety for the future.
Apparently, jewellery demand in India shot up 34.8 per cent to 153 tonnes in the fourth quarter of 2012 compared with 113.5 tonnes in the same quarter of the previous year. In the same period, investment demand also jumped 51 per cent to 108.9 tonnes from 72 tonnes in the corresponding years period. Indian consumers buy gold for safety against inflation. Since inflation has been a major problem for average Indian households, they take refuge in gold, said Mehul Choksi, managing director of Indias largest branded jewellery producer and retailer, Gitanjali Gems. He said gold demand would continue, especially as compulsory buying for wedding and other such opportunities, in addition to its upbeat demand for auspicious occasions. The yellow metals appeal as a hedge against the worst economic times has also been driving its demand in India.
Consequently, gold import in the quarter ended March 31, 2013, is expected to remain around 200 tonnes, of which around 100 tonnes was already imported in January. Since these rising imports widen the trade deficit, a major government concern, it has tried to curb imports. Jewellers, however, see these measures as an encouragement to smugglers.
A huge quantity is coming in through Singapore, Dubai, Nepal (with two per cent import duty) and Bangladesh through smuggling, where the government has no control. The increase in import duty has just added some additional money to the governments kitty. Being consumer-oriented products, its consumption cannot be stopped, said Ashok Minawala, an industry veteran and ex-chairman of the All India Gems & Jewellery Trade Federation.
Gold import into India, therefore, is expected to remain between 850 and 950 tonnes this calendar year, irrespective of the measures, he added.