Is India losing its love for gold?

All that glitters.
All that glitters.
Image: REUTERS/Sivaram V
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Indians adore gold.

No family ceremony is complete without the yellow metal. And it is also the favourite asset class of those with no access to the formal financial system. Small wonder then that India is one of the world’s largest consumers of gold.

But demand has plateaued in recent years. According to the World Gold Council (WGC), this year it is expected to be around 800 metric tons—a modest 10% increase from the 2017 level of 727 metric tons.

As many Indians head to their local jewellers to buy gold on the auspicious occasion of Dhanteras on Nov. 5, the WGC expected subdued demand.

“The recent sharp increase in prices could weigh on the consumer wallet, limiting purchases during this season. Anecdotal feedback from the industry suggests that though footfalls seem to be good, demand could be moderate,” said PR Somasundaram, the India managing director of the WGC. “Organised players seem better placed, a trend that has become evident in recent years after a spate of transparency measures.”

While sales have been increasing moderately, it is still a far cry from the levels in the early 2010s when annual demand almost approached the 1,000-ton mark.

Consumer demand had hit a seven-year low in 2016 due to the regulatory environment. The most dramatic of these changes, according to the WGC, was demonetisation—the Narendra Modi government’s decision to demonetise over Rs15 lakh crore ($220 billion) worth of Rs500 and Rs1,000 currency notes that year.

The re-introduction of excise duty and the mandatory requirement to furnish PAN card details while making high-value gold purchases also depressed demand. India’s recently-instituted Goods and Services Tax (GST) regime has increased the tax and duties on the precious metal, which is also affecting demand. The new tax scheme is, thus, more beneficial for large, organised retailers over smaller ones.

“In the last three to four years, a lot of new changes have been introduced in the market, such as GST and PAN card (requirement) that have impacted demand…but if you stabilise policies, then demand (for gold) will grow as incomes grow,” said Gaurav Mathur, managing director of Safegold, a digital gold-buying platform.

Going forward, gold will continue to function as an attractive asset and investment class, especially among younger consumers in India, says Mathur. “After fixed deposits, if there is anything consumers understand, it is gold—it isn’t a bad investment over the long run, especially if investment into gold is made more convenient.”