Citizens' Love For Gold Has Created Serious Economic Issues For India
Lorimer Wilson on 2016-12-09 13:27:24.0
Indians' famous love for gold has created serious and ongoing economic issues for the nation. In 2011, Australian investment bank Macquarie estimated that 78% of India's household savings were held in gold. In effect, this means that India has a dual currency system where people choose to save mostly in gold rather than rupees. This is unlike any other major economy and begs the question: how do you wean a population off a precious metal?
The comments above and below are excerpts from an articleby Fergal O'Connor (theconversation.com) which may have been edited ([ ]) and abridged (?) to provide a faster & easier read.
The Indian government has been trying to reduce its citizen's demand for imported gold through a number of means over the last few years. This is part of a wider crack down on currency used in the black market, that included the withdrawal and replacement of its two largest denomination bank notes in early November…
Building up savings in gold rather than deposits in a bank creates a permanent drag on India's growth. This happens because the savings do not increase the available funds for lending within the banking system. One reason it is so difficult to put this gold to work as investment capital is that 79% of it is bought as jewellery, rather than bars or coins.
India is the world's largest consumer of gold jewellery at nearly 700 tonnes in 2015 according to GFMS Gold Survey 2016. However, it mines less than two tonnes of gold a year. This means India must import gold worth US$25 billion each year, pushing up their current account deficit and pulling down the value of the rupee.
In 2015, Prime Minister Narendra Modi's government introduced a Sovereign Gold Bond scheme which allowed gold holders to swap their gold for an interest bearing bond. At the end of the bond's life investors would effectively be returned the same amount of gold. This move reduced the minimum amount of gold necessary to participate in such a scheme to two grams. As of November 2016, 14 tonnes of gold had been subscribed to the two gold bond issues, with another five tonnes collected through the older gold monetisation scheme (which has a larger minimum deposit of 30 grams). However, relative to India's estimated privately held gold stock of 20,000 tonnes these deposits represent tiny amounts and it still doesn't seem like a solution.
An alternative would be to permanently reduce gold imports. To that end, in 2013, the government started to increase import taxes on gold imports to 6%; this now stands at 10%. However, falling gold prices during that period meant that there was still a 12% increase in gold imports in 2015 as consumers snapped up what they saw as bargain prices.
…India has battled precious metals imports for quite some time. In 1910 the government of India increased the import tariffs on silver from 5% to 11%…[which resulted in] a 28% fall in silver demand in the Indian bazaars in the three years following the increase. They attributed this to not just a fall in demand for silver due to tax increases, but also a substitution of gold for silver in people's savings as gold became more attractive on a relative basis.
Between 1910 and 1930 net imports of silver in India fell from 98m [troy] ounces to 31m, according to British Geological Survey Reports. After this time India gradually became the world's largest gold consumer, a position it finally lost to China in 2015, [but] it seems a return to silver as a major investment for consumers in India may be in the cards.
Following the recent import tax hikes for gold, 2015 saw Indian silver imports grow to almost 8,000 tonnes, 14% up on the previous 2014 record. At the same time, demand for gold jewellery, which accounts for 75% of all Indian gold demand, is down 30% for the 12 months to the end of September 2016, according to the World Gold Council. This points to a possible shift back to silver as a more prominent investment in India.
Gold makes up the vast majority of Indian jewellery sales but the graph below shows the rapid growth in silver jewellery demand in India, which is up over 600% in ten years, relative to marginal growth of only 25% in gold jewellery demand…For a sense of scale, the Indian gold Jewellery market in 2015 was worth US$25 billion, while the total world silver jewellery market was worth only US$3.5 billion.
Growth in Indian Gold and Silver Jewellery Demand.Thomson Reuters GFMS Gold 2016 and Silver Survey 2016, Author provided
Conclusion
Even a small substitution from gold to silver would result in a massive increase in the price of silver. A 10% reallocation from gold jewellery investment to silver in India would nearly double world silver jewellery demand. Mines and other sources would not be able to fill the gap immediately; prices would rise, further fuelling demand and creating a new, shiny headache for those trying to marshal India's unusual economy.
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As the Indian government cracks down on large denominated bills, and is reportedly considering measures to limit gold holdings, silver has emerged as a potential major beneficiary.
Australian investment bank Macquarie estimated that 78% of India's household savings were held in gold. In effect, this means that India has a dual currency system where people choose to save mostly in gold rather than rupees. This is unlike any other major economy and begs the question: how do you wean a population off a precious metal?
