Government Policy Changes Should Boost Indian Gold Market

Some policy shifts recently announced by the Indian government in its Union Budget will likely have a positive impact on the country’s gold market. India ranks as the second-largest gold-consuming country in the world, second only behind China.

The three key policy changes that will likely affect the gold market are:

• A reduction in the gold import duty
• Authorization for the Securities and Exchange Board of India (SEBI) to regulate domestic gold spot exchanges
• Establishment of welfare schemes for rural areas designed to boost income

The duty on gold bars will drop from 12.5% to 7.5%. Consumers will pay 14.07% tax for refined gold compared to 16.26% previously. Analysts at the World Gold Council project the cut in import taxes could boost demand by as much as 13 tons in 2021.

According to the World Gold Council, SEBI oversight may spur infrastructure development, and will likely lead to higher trading and more effective gold price discovery in the domestic gold market.

The welfare programs for rural Indians will boost income. Rural India accounts for around two-thirds of the nation’s gold demand, and this is heavily linked to income levels. More money in people’s pockets will almost certainly boost demand.

The Indian gold market is already showing signs of revival after languishing over the last couple of years. The pandemic crushed demand, particularly for gold jewelry, but record-high gold prices in rupee terms and government policy put a drag on the gold market even before COVID-19. There were signs of a turnaround late last year and it continued through the first month of 2021.

A further recovery in the Indian gold market would further boost global demand and would be supportive of gold prices.

Indians traditionally buy and hold gold. Collectively, Indian households own an estimated 25,000 tons of gold and that number may be higher given the large black market in the country. The yellow metal is interwoven into the country’s marriage ceremonies and cultural rites. Indians also value gold as a store of wealth, especially in poor rural regions. Two-thirds of India’s gold demand comes from these areas, where the vast majority of people live outside the official tax system.

Gold is not just a luxury in India. Even poor people buy gold in the Asian nation. According to an ICE 360 survey in 2018, one in every two households in India purchased gold within the last five years. Overall, 87% of households in the country own some amount of the yellow metal. Even households at the lowest income levels in India own some gold. According to the survey, more than 75% of families in the bottom 10% had managed to buy gold.

While consumer demand for gold was hit hard by the pandemic, gold has helped Indians weather the economic storm caused by the coronavirus. The government response to COVID-19 ravaged the Indian economy. As a result, many banks were reluctant to extend credit due to fear of defaults. In this tight lending environment, many Indians used their stashes of gold to secure loans.

For many Indians, gold is a lifesaver, providing liquidity that they otherwise wouldn’t have.

Indians understand that gold tends to store value and that in the end gold is money. If they have gold, they know they will be able to get the goods and services they need – even in the event of an economic meltdown. And while westerners may not embrace the cultural and religious aspects of the Indian love affair with gold, the economic reasons for their devotion to the yellow metal are every bit as applicable in places like the US.