Five years ago, any sign of weakness in the Rupee would have been the cue for RBI officials, Ministers and sundry economic commentators to lash out at Indian households for their unreasonable and unpatriotic love for gold.
And it is true that gold imports had a big role to play in India’s yawning trade deficit and precarious balance of payments position in 2013.
But as the Rupee has entered shaky territory again in recent weeks, it is oil rather than gold that has been the hot topic of debate. There’s good reason for this shift.
A break-down of India’s import bill suggest that gold is no longer the villain of the piece when it comes to exchange rate woes. In fact, data suggest that the Indian saver’s love affair with gold may be well past its prime.
Shrinking imports
When India faced a run on the Rupee and a widening trade deficit in 2013, its annual gold import bill had topped $50 billion for the second year running. Between FY10 and FY13, India saw consistently high demand for gold jewellery, bars and coins despite galloping global gold prices.
This bloated the country’s gold import bill from about $28 billion in FY10 to a record $56 billion in FY12.
But gold imports have since seen substantial moderation from those excessive levels. In FY18, India’s dollar outgo on gold imports amounted to just $34 billion, having shrunk 40 per cent from the peak six years ago. Lest you think this is an aberration, gold imports have hovered in a narrow range of $27 billion to $35 billion for five years now. Bullion accounted for nearly 12 per cent of the country’s import bill in FY12. But its contribution is now down to about 7 per cent.
This explains why debates around the current account deficit no longer obsess over the yellow metal.
Trends in domestic demand, tracked by the World Gold Council, show that Indian consumers have been cutting back on the volume of gold purchases in the last five years. In the years from 2010 to 2012, consumers accumulated anywhere between 900 and 1,000 tonnes of bullion a year. Jewellery accounted for about two-thirds of this volume, with bars and coins making up a third.
In the last five years though, bar and coin demand has halved from 355 tonnes in 2012 to 164 tonnes in 2017. Jewellery demand, after rising from 595 tonnes to 662 tonnes between 2012 and 2015, has flat-lined, slipping back to 573 tonnes in 2017.
As a result, aggregate domestic demand for gold has fallen by 20 per cent between 2012 and 2017.
So, what has made Indian consumers cold-shoulder their favourite asset? Several factors seem to be at play.
Poor investment returns
Indian gold buyers view bullion as much as an investment as an item of adornment. We all know that any investment is most sought-after when its returns are soaring. So it was with gold.
In the five years following the global financial crisis in 2008, gold churned out bumper returns for Indian investors who hoarded it, thanks to a global flight to safe-haven assets and a steadily depreciating Rupee.
With domestic gold holders earning a 20 per cent plus return for five consecutive years until 2013, investment demand for the yellow metal sky-rocketed. Gold is also seen as a hedge against inflation and the runaway price-spike in this period also stoked demand.
But with the global stock and bond markets staging a recovery from 2013, and inflation flagging, gold began to lose its mojo. As the Rupee stabilised, domestic gold investments suffered three consecutive years of negative returns from 2015 to 2017, dousing investor interest. Purchases of bars and coins, which topped 340 tonnes in 2013, had crashed to 164 tonnes by 2017.
Jewellery loses sheen
If investment demand for bullion usually picks up when prices are sky-high, jewellery purchases are mostly wedding-related and perk up when prices are low. Domestic jewellery demand, which hovered at 600 tonnes in 2012 when prices were at a high rose to 662 tonnes in 2015 as prices fell.
But demand has slumped rather sharply thereafter, falling to 505 tonnes in 2016 and 573 tonnes in 2017, as per WGC data. The weakness continued into 2018, with purchases down by 12 per cent in Q1. In the last six months, jewellers have been repeatedly disappointed by lacklustre demand after building up inventories in anticipation of the wedding season and festivals such as Akshaya Tritiya.
One explanation for this could be the persistently high Rupee gold prices, upwards of ₹2,900 a gram since 2016. In the past, Indian jewellery buyers always returned to the market once they were used to higher rates. But they are taking an inordinately long time this time around.
Why dull demand
This suggests that there could be other factors at work behind weak jewellery demand. One possible explanation is that the Centre’s concerted crack-down on cash transactions and tax evasion post-demonetisation has permanently reduced demand for gold as a stash of unaccounted money. The imposition of GST on jewellery is likely to have further expedited this formalisation process. Large listed players such as Titan Industries have defied industry trends to report strong sales numbers in the past year, offering proof of formalisation.
Two, it is possible that rural consumers, hit by two consecutive drought years in 2015 and 2016 cut back on their gold purchases. But then, rural demand for tractors, two-wheelers and FMCGs has picked up strongly in the March 2018 quarter, but jewellery demand has remained lacklustre.
Three, waning appetite for bullion may also be attributable to India’s demographic transition and changes in consumer behaviour. When it comes to the GenNext, items such as smartphones, I-Pads and European holidays, may take priority over jewellery when there’s extra money to splurge. Leading jewellery players also point out that younger jewellery buyers favour low-grammage or studded jewellery over the traditional heavy pure-gold pieces.
Finally, it is entirely possible that Indian savers have finally woken up to the unattractiveness of gold as an investment asset and are now unwilling to park their savings in an illiquid and zero-cash flow generating asset.
Consistently high returns from the stock market and equity mutual funds in the last four years may have prompted them to allocate more savings to these assets, instead of gold.
While there’s no recent RBI data on household savings in gold, there is data showing that incremental savings flowing into financial assets such as shares, bank deposits and mutual funds jumped from ₹9 lakh-crore to ₹18 lakh-crore between FY12 and FY17.
If this turns out be a structural trend, it would be time for those commentators to laud Indian households for successfully throwing off their addiction to gold.