Indians' love for gold ornaments may take a temporary dip this year as the potential customers wrestle with a reduced currency float and jewellers grapple with an impending new tax legislation that may hurt demand, the World Gold Council said in two reports.
Prime Minister Narendra Modi introduced the demonetisation of the 1,000-rupee and the 500 rupee notes in November which resulted in 86 percent of the currency float being sucked out of the economy in less than two months. Indians generally buy gold as an anti-inflation assets and a vast majority of the purchases are done with undeclared cash. The removal of high denomination notes and the subsequent slow remonetization has resulted in jewellers' showrooms being mostly empty for the past two months except for necessary gold purchases during the marriage season.
“We believe that the liquidity squeeze could have a temporary effect on economic growth, and may also affect gold demand in the short term,'' the report said. “Any tightening in gold related policies, such as the measures that have been recently implemented to regulate and formalise the gold industry are disruptive and will stifle demand in the short to medium term.''
The government over the past decade has implemented a series of measures to wean citizens away from gold purchases. They include increasing customs duty on gold imports, which consume the second largest chunk of foreign exchange spending after crude oil imports; introducing a gold monetization scheme to mobilise gold held with households, trusts and places of worship and offer paper gold.
Indians typically buy gold when the economy is expanding and salaries and business incomes rise. India and China together accounted for nearly 50 percent of global gold demand in 2016 from 25 percent in the early 1990s. Economic prosperity lead to higher purchases of the precious metal.
Indians purchased 858.1 metric tons of gold in 2015 worth $35 billion. The gold council estimates demand for the yellow metal was lower between 650 tons and 750 tons during 2016 as a slowing economy, stagnant salaries and the demonetisation drive sucked out discretionary purchases from the economy.
The council now estimates that Indians will buy between 850 tons to 950 tons of gold each year by 2020 as the economy recovers its upward trajectory and salaries rise.
“We believe that the transition to transparency and formalisation of the economy will lead to stronger Indian growth in the longer term, thus benefitting gold,'' the report said.