The World Gold Council, which represents the interests of large global gold miners, has been working closely with the government to usher in greater transparency in gold trade. Somasundaram PR , Managing Director (India), World Gold Council, spoke to BusinessLine on what lies ahead for the industry. Excerpts:

How do you see gold demand in the coming days?

India’s five-year average gold demand is 850 tonnes. Last year, we saw exceptionally low demand, and that has continued in the same trajectory of 650-700 tonnes this year too. The demand in these two years is at a seven-eight year low. The fall in demand was due to the fact that government has brought in fundamental changes not just on gold, but also broadly in the overall economy, to drive transparency. This has been disruptive. It started with the levy of excise duty in the first quarter of 2016; then came the PAN card rule, followed by the income disclosure scheme, which targeted real estate and gold. This deterred gold buyers and curbed the unorganised market. After this came demonetisation, which hit gold sales significantly—although it spiked in the initial weeks. This was followed by the rollout of the Goods and Services Tax (GST) and the implementation of the Prevention of Money Laundering Act, which has put pressure on unorganised players. Unorganised players account for 70 per cent of this industry. The transition to GST and transparency are critical issues. In addition, gold, along with real estate, is central to the black economy. I would say the market is getting adjusted to transparency issue, which has led to a demand drop.

In the long term, gold demand is driven by income growth. Our analysis has established that every 1 per cent increase in income leads to 1 per cent growth in gold demand. Similarly, every 1 per cent rise in gold price leads to a 0.5 per cent decrease in demand. In the Indian context, the demand will rebound as rural income is set to grow. The government’s vision to double farmers’ income by 2022 will lead to a sharper increase in rural gold demand. We do not believe that India’s annual gold demand will be limited to 650-750 tonnes. It will bounce back to 850-950 tonnes in another 18 months.

Is the move to ensure greater transparency a Damocles’ sword hanging over the industry?

It is. That is why we believe it will take at least 18 months for the industry, consumers and the general ecosystem to get adjusted to it. Two things go in favour of gold. One, the measures taken by the government are not specific to gold: many luxury purchases too have been affected. Therefore, the mindset and behavioural change reflects a broader societal change triggered by the regulation leading to digitisation. This is not specific to gold. When you are doing it for others, it will have a rub-off effect on gold, particularly when it has greater potential to become a transparent economic asset. That is why we are confident that not just the demand for gold jewellery, but investment in branded bars and coins, will see a sharp increase.

Is the industry concerned that the annual demand has fallen to 650-750 tonnes?

No. It is a temporary phase till the trade and consumers get adjusted to new norms. It will get readjusted to 850-950 tonnes by 2020. The trade will see a lot of disruption. Adjusting to this new norm will be an issue. On the positive side, NITI Aayog is bringing out a report on the transformation of the gold industry. So, there is a more holistic view of the industry. With demand at 650-750 tonnes, the government is also thinking that it is curbing the gold jewellery export, which is not a desirable thing. It is affecting employment potential. Now, the government is thinking beyond the current account deficit problem. The industry is open to new ideas.

Does the industry need some help to expand the market?

Yes. The new gold policy reflects a thinking along those lines. The policy is not just about curbing imports, but about value addition for the imports we do. We have seen many measures to wish away gold demand, but they have not worked. There are 200 million people at the bottom of the pyramid who will become savers. Even if all of them buy one gram each, it will translate into 200 tonnes a year. Despite India being the second-largest gold market, the per-capita gold consumption is low . That will grow, and any attempt to wish away gold demand will open up the black market, which is not a healthy trend.

Gold is an inter-generational asset: you can pass it on to the next generation. While framing policies, the government should look beyond curbing gold imports. People love gold and they always buy through non-financial channels. So why cannot we channel it through the financial system? Why cannot we have gold-denominated insurance, where an insurance company promises to give 500 grams of gold as compensation to the family in case the insured person dies? We need to find regulatory gold products. The household finance committee of the RBI has said that we need a regulatory sandbox for new financial products. It will be fantastic to have gold-based financial products. For instance, why cannot we have gold as the basis for remittance by NRIs or the labour workforce instead of the dollar? They pay enormous commissions to send it as dollars. They can send it as gold through Indian banks that have a presence abroad. It will reduce India’s gold imports. Instead of allowing star trading houses to import gold, you can allow our expats to import gold.

Won’t gold become a parallel currency in that case?

We started our financial reforms by allowing expats to bring in gold. So why cannot we allow it through the remittance system? We need to think beyond the current account deficit. Curbing gold imports could lead to undesirable consequences. Today, electronic imports are $30-35 billion. Of this, about $10 billion is smartphones. We can make smartphones, but still we import them. We cannot mine gold easily, but still we do not want to allow import. So there is a case for re-examining the position of gold. One of the reasons why gold demand is only about 650-750 tonnes is because inflation is low and investors are getting higher real positive interest from fixed deposits.

Despite laws mandating hallmarking of gold jewellery, it is not being implemented. What stops jewellers from adopting it?

The foremost is a change in mindset. We need more assaying centres. Right now, there is more traction towards hallmarking, but it needs to be enforced more forcefully. The regulations need to be practical: the industry should not be put to difficulty and consumers should not be cheated. We need to strengthen the BIS (Bureau of Indian Standard) enforcement machinery. There are only 530 hallmarking centres; all of them are concentrated near large consuming centres. There are 400,000 jewellers across India. How do they get their jewellery hallmarked? Of course, now hallmarking is done at the jewellers’ end, and not at the manufacturing end. An alternative is to get some manufacturers to hallmark jewellery by themselves. If there is an issue with purity, consumers can go back to the manufacturers directly. As a practical solution, the government can implement mandatory hallmarking in metro cities.

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