By K Raveendran
The government has announced plans to monetise the huge domestic gold holdings from time to time, each subsequent version seeking to correct the drawbacks with the previous plans. But the hard fact is that none of these achieved even a fraction of the desired results.
Indian households hold an enormous amount of gold, of the order of an estimated tonnage of up to 25,000.The metal retains a special place in the hearts of the people, for whom it is much more than a precious metal. It also has deep cultural significance, it is what will make beautiful wedding jewellery, it is a safe haven in times of distress, and it is a hedge against inflation.
It is no surprise, therefore, that the government is keen to get some of this gold into the economy. Mobilising it would cut the need for imported bullion and have a direct positive effect on the country’s account deficit. But there are hurdles, which continue to remain unaddressed.
Insights are now available as to why the government schemes have failed. A World Gold Council paper on India’s gold investment market and financialization as part of its India gold market series concludes that the government’s gold monetisation scheme (GMS) has failed to fully understand the way in which Indian households held gold.
The paper notes that while the changes made in the scheme over time have made it somewhat more accessible. In fact, the current version allows gold deposits to be held over five or seven years with interest paid in rupees at the end of the term. But the council notes that only six per cent of households are aware of the scheme and there are no incentives for banks to become involved in its operation. The government has introduced policies to improve the country’s gold-related infrastructure – including the establishment of domestic gold spot exchanges and plans for an India International Bullion Exchange – which are intended to make meaningful progress towards monetising India’s stock of gold. But the overall result remains the same.
Historically, the loan against jewellery market has been strong but unorganised, and despite fulfilling the need to liquidate gold, such loans have traditionally carried high interest rates. While the majority of the market remains unorganised, over the past three years the number of organised lenders has increased from 35 percent to 40 percent as at the end of 2022 and the amount of loans arranged through banks has surged three-fold from pre-pandemic levels. Including the agricultural sector, the loan against jewellery market is now valued at between 2,950 and 3,350 tonnes.
India is the second largest bar and coin market globally. Gold is highly valued, used as a means of household investment as well as an adornment for weddings, festivals and more. In a country where access to banking facilities has been limited, especially across large swathes of rural India, gold has historically been the investment of choice. India’s population is young and attitudes are shifting. This generation saves less than their parents; is technology savvy; spends more on luxury goods and holidays. And the government’s drive towards financial inclusion is bringing banking facilities and wider investment opportunities to a far larger audience than ever before.
When the first gold ETF was launched in 2007 it was a notable success. However, the rising equity market proved too much of a temptation and demand was soon dented. Not until the pandemic caused economic alarm did the ETF market recover and by the end of 2022 gold ETF holdings stood at 38 tonnes. Since then, ongoing geo-political tensions have reinforced the need for safe-haven assets and the digital gold investment market has responded. Now, 16 companies offer digital gold products in India with an estimated 5-6 million active gold accounts. Gold savings funds and multi-asset funds offer another route into gold-backed ETFs and sovereign gold bonds allow investors access into gold with a bonus interest payment at term end. These gold-backed financial products, and others, are expected to continue their rapid development.
Physical assets make up the most significant part of household savings; this includes real estate, and gold and silver bars, coins and jewellery. In essence, gold bars and coins play a diverse role in fulfilling investment demand. Metals Focus’ field research suggests that some 40-50 percent is eventually converted into jewellery. This means that investment products satisfy the dual role of savings while supporting jewellery purchases. As a result, India has become the world’s second largest bar and coin market, consuming an average of 187 tonnes annually over the last decade.
Retail investment in gold has suffered over recent years. Several factors account for this relatively subdued performance, notably: greater financial inclusion; the outperformance of gold by equities; new government regulations – such as high import duties and the clampdown on unaccounted money – and changing demographics.
Some investors prefer jewellery over bars and coins as the former serves both as an adornment and as an investment. Over the last few years gold investment products have seen their share of overall consumer demand fall, from 35 percent in 2013 to 22 percent in 2022. A brief recovery in 2020 to 29 percent appears to be a one-off, which owed more to the steep fall in jewellery sales, particularly wedding purchases, during lockdown. From a longer-term perspective, declining demand for gold investment products is indicative of greater financial inclusion, increased awareness of other financial products on offer and changing demographics. (IPA Service)
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