The Hindu Business Line : The changing scenario

GOLD and silver (bullion) have a tremendous historical, religious, cultural, social and economic significance in India. Copious references can be found in the country's mythologies, epics and other literature over centuries or even millennia about bullion.

India is by far the largest importer and consumer of gold in the world. About 25 per cent of global production is consumed in India. By volume, the country's imports average 700 tonnes a year, accounting for over a fifth of world jewellery fabrication.

In India, demand for gold is highly income elastic and price elastic. Higher incomes drive demand up; likewise lower prices. High prices without corresponding rise in incomes will lead to demand compression as borne out by the experience of 2002-03 (drought year). In 2004-05, despite high prices (over Rs 6,000 per 10 gm), demand is unabated.

Agricultural production, marriages and festivals are the main demand drivers. A good monsoon results in a rise in rural incomes, which in turn drives demand for bullion up. As incomes rise, consumers at the lower end tend to graduate from silver to gold to an extent.

Lower market prices too encourage gold purchases while high prices lead to a slowdown in demand growth. Despite being the largest importer, the country's per capita demand for gold is still low.

India's market for gold was highly restricted until recently. Gold (Control) Act, 1963 placed gold (and to a lesser extent, silver) market under high regulation as the precious metal was perceived to be a premium product for rich people, not essential for the common man. Regulation led to unofficial activities. The Act was, however, abandoned in 1990.

After India embarked on the process of economic liberalisation and free markets in July 1991, the following years (1992-94) saw some liberalisation of imports. Gold and silver were allowed to be brought in by NRIs (non-resident Indians). Imports were allowed against SIL (Special Import Licences issued as export incentive) too.

This resulted in improved availability of bullion and discouraged to some extent unofficial activities. In November 1997, gold imports were placed under open general licence. Some banks and designated agencies have been authorised to import.

Import liberalisation since mid-1990s has dramatically raised official imports. Today, Indian gold market closely follows international prices.

However, despite being the world's largest importer and consumer, Indians are price takers and not price setters in the world market.

Gold demand worldwide is estimated at about 3,400 tonnes per annum. Of this, fabrication demand is about 2,700 tonnes, industrial demand is approximately 360 tonnes and retail investment 340 tonnes.

Globally, silver market largely follows gold. World silver demand is an estimated 28,000 tonnes.

The white metal has industrial uses. Demand for silver in India is estimated at 3,800 tonnes.

Globally, in the futures markets, daily turnover of gold is around $ 10 billion. In India too futures trading in gold and silver is picking up very well.

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