India's gold demand hit by note ban, but long-term holds good on strong consumption hopes

Mumbai: Gold demand in India -- the world's largest consumer -- has been affected in the short term because of the demonetisation shock, but long-term prospects are encouraging with consumption to average at 850-950 per annum by 2020, the World Gold Council (WGC) said Tuesday.

While the main demand will be for jewellery, bar and coin investment is expected to be 250-300 tonnes by 2020. Jewellery exports are estimated to touch the $40 billion mark, from the current $8.6 billion.

Stating that transparency across the value chain is necessary for gold to be mainstream, WGC said gold trade will become more transparent with introduction of GST, mandatory hallmarking and a massive push by organised jewellers to promote non-cash payments.

However, the latest cash ban exercise should also expand the tax base and the positive impact on public finances could generate a more benign and gold-supportive policy approach, it suggested.

 Indias gold demand hit by note ban, but long-term holds good on strong consumption hopes

Representational image. AP

There has been short-term impact on gold demand in the country due to demonetisation as there were fears that the government may cap gold holdings and gold buying. Buyers stayed away for a brief while, said Somasundaram P R, head of WGC's India operations, after unveiling the report titled India's Gold Market -- evolution and innovation. Since it is difficult to say right now how much of an impact the demonetisation move had on gold demand, WGC is still analysing it and will come out with a detailed report soon, he said.

"As of now, we still maintain that overall gold demand will average at 650-750 tonnes in 2016. Definitely, demand will be at a lower range," he said.

India's gold demand stood at 441.2 tonnes in January-September of 2016. Demand during Diwali and for weddings held up well until 8 November when the government announced ban on Rs 500 and Rs 1,000 notes, according to the WGC.

Gold smuggling is expected to be higher in 2016 because of 1 percent manufacturing excise tax. About 119 tonnes are estimated to have been imported through unofficial channels in 2015, it said.

Observing that cash crunch is taking a toll on gold demand in the short term, WGC in the report said even genuine gold buyers are reluctant to buy wedding jewellery as there is panic after taxmen investigated some jewellers who had,  immediately after demonetisation, created opportunities to convert old currency for fake or back-dated sales.

The caps on withdrawals from banks and lack of cash in ATMs meant that whatever cash available was largely spent on essential items -- in both rural and urban India -- it added.

Small jewellery businesses, particularly in rural centres, will feel the pinch until cash becomes more freely available, the council said further.

Stating that India's economy is going to be strong and will support the gold market, WGC Market Intelligence Director Alistair Hewitt said, "In 2016, India was one of the world's fastest growing economies. While the economy was rocked by the shock demonetisation programme, it will bounce back and that will support the gold market in years to come."

Given that the outlook for income growth is positive, by 2020, "we expect Indian gold demand to average 850-950 tonnes per annum".

On India's gold imports, WGC said that in the short term, the removal of some import restrictions will have two main benefits. First, nominated agencies will be better able to source bullion to meet the apparently endless appetite for gold in India. Second, this increased flow will likely make the environment less attractive for unofficial gold imports.

The outlook for dore (raw) gold imports is less certain as Indian refineries already face challenges in sourcing and the reduction of dore or bullion differential in 2016 Budget has dampened the incentive for refineries to source dore, the report stated.

"The huge excess refining capacity in India will come under further pressure in years to come, and we may see closures and consolidation in the industry," WGC noted.

On future of gold mining in India, the council felt that it has been hampered by bureaucracy and under-investment. The gold mining industry is small, but it has potential to grow.

According to government data, India's current defined gold reserves is 71.9 tonnes. In addition, 568.5 tonnes of gold are defined in the primary (hard rock) resource category while 5.9 tonnes have been defined within placer deposits.

Over 99 percent of gold mineral reserves are located in Karnataka while the remaining in Jharkhand, although at under 0.2 tonnes, are trivial.

On gold monetisation, WGC said the outlook is interesting, but the scheme still faces significant challenges.

For the scheme to be a success, it needs to address the key issues of trust, ease of use, incentives and infrastructure. If any of these is overlooked, the scheme may struggle, the report pointed out.

Despite the significant stock of gold in India, WGC said, "Our view is that little of it will be monetised anytime soon.

It will take time to build the necessary infrastructure for banks to develop and market the right products, and for customers to respond."

It added: "Once the infrastructure is in place, greater volumes of gold can be monetised. We envisage up to 25 tonnes being monetised within the next 2-3 years.

According to the report, India has gold stocks of around 23,000-24,000 tonnes.

Southern India has the highest market share for gold demand (40 percent), followed by western India (25 percent), whereas it stands at 20 percent and 15 percent, respectively, for north and eastern India.

Observing that gold industry in India is one of the most regulated, WGC said the industry still faces challenges. For a start, small and medium sized manufacturers struggle to obtain gold loans to purchase material.

For 2015-16, only Rs 727 billion were made available to the industry by the financial sector, which account for just 2.7 percent of total bank credit. This is unlikely to change anytime soon, WGC predicted.

India is dependent on imports and recycling to meet gold demand. Gold imports account for around 85 percent of total supply and the refining sector plays an important role in giving these imports a suitable form.

Updated Date: Jan 24, 2017 13:28:40 IST