Gold & Jewellery Demand Down in India

India government’s sustained efforts to bring down gold consumption in the country with an aim to control its ever-increasing Current Account Deficit (CAD) have started showing positive results. The latest figures of a quarter ending on September, 2013 published by the World Gold Council (WGC) show that India’s gold demand for Q3 2013 was at 148.2 tons. It has been reduced by 32% compared to Q3 demand for 2012 which stood at 219.1 tons while it was 310 tons during the second quarter of 2013.

Jewellery demand for Q3 2013 has come down by 23% at 104.7 tons compared to 136.1 tons in Q2 of 2012. However gold jewellery demand in India remains strong but scanty supply has prevented the demand from being fully fulfilled. There has also been a big drop in investment demand as the Indian people preferred other asset class for investment due to frequent ups and downs in the yellow metal prices. The investment demand was down by 48% at 43.5 tons.
It must be noted here that the main reason behind downfall in India’s gold demand is government’s various curbs that included an increase in import duty to 10% and tough restrictions on the yellow metal’s imports by linking imports under the 80:20 rule.

So, if the same trend continues, India’s gold imports are likely to fall by 40% to 500 tons in the current financial year which would provide a great relief to the government. The Reserve Bank of India (RBI) along with the government has introduced drastic measures to curb gold demand and as a result of which gold imports till October have totaled about 400 tons. The RBI Governor Mr. Raghuram Rajan expects India’s CAD would to be less than $56 billion. “RBI’s estimate is that the CAD for this financial year is expected to be about $56 billion which would be less than 3% of GDP and $32 billion less than previous year,” he said.

Mentioning more reasons behind India’s recent trends, the WGC said that apart from government curbs, two more factors have helped India’s gold demand to stay at 148 tons, without which the demand could have been even lower. The first reason is significant increase in supply of recycled gold. Indian people sold more family gold in Q3 to take advantage of the current price rise of the yellow metal and to earn good returns. The WGC data shows there has been a 44.5% increase in recycled gold to 61.3 tons from 34 tons as compared to last year.

Second reason that increased the supply was gold imports through illegal channels (smuggling). Heavy import duty (10%) on gold in India and strict import rules have resulted in huge quantities of the precious metal smuggled into the country. However no specific figures of the smuggled gold are available, but the industry source estimate suggests 40 to 50 tons could have entered India after July 2013.

India’s Finance Minister Mr. P. Chidambaram has recently said that India’s CAD would be controlled below $60 billion this financial year. “I think we can contain the CAD at $60 billion or below.” he said. India’s CAD had touched $88.2 billion or 4.8 per cent of GDP during last financial year. Huge gold imports (about 800 tons) were responsible to push CAD to a record high in the previous fiscal.

The recent downfall in India’s gold demand may be a win for the government but certainly not for the jewellery industry here which feels being gagged by the stringent curbs on gold imports.

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