After terrible 2016, Indian gold demand will recover: WGC
The intentions of Indian Prime Minister Modi's government were noble: crack down on tax evasion/ the black market, and move India from a cash-based economy to one based more on digital transactions, like other modern economies. But Modi's surprising move last November to "demonetize" the equivalent of US$220 billion in large Indian bank notes – an astounding 86% of the circulating currency – had a disastrous effect on the gold trade, and other sectors of the Indian economy that are reliant on cash transactions.
According to a new report by the World Gold Council, the gold trade in India faced challenges even before demonetization kicked in. In the first half of 2016, a 1% excise duty on jewellery manufacturing prompted a 42-day strike; Indian jewellery fabrication was at a 20-year low in 2016. Combine the excise duty with a soaring gold price, throw in the demonetization scheme that occurred near the end of the year, and the result is that Indian gold demand in 2016 was pushed to its lowest level since 2009, according to WGC.
The anti-gold policies also ensured that India lost its usual ranking as the world's largest gold consumer last year to China. The country demanded just over 600 tonnes of gold in 2016, compared to 800+ tonnes in 2015 (see chart below).
Such is the appetite for gold inside the country that importers have always been able to charge premiums for physical delivery, sometimes in excess of $100 an ounce during the busy festival and marriage seasons that kick off in October each year. On the import side though, last year was also bad for India. Following government import curbs and duties (an onerous 10%) and other trading restrictions introduced in recent years, gold imports all but imploded.
Thankfully for Indian gold traders and jewellery manufacturers, the near future doesn't look quite as dire for the South Asian nation.
According to WGC, Indian gold demand has bottomed. And while it still faces headwinds, including a ban on cash transactions over Rs300,000, the council expects consumers to buy between 650 and 750 tonnes in 2017, rising to between 850t and 950t by 2020.
"Headwinds will be off-set by strong tailwinds," reads the report. "A banking system flush with liquidity, the bumper crop after a good monsoon, and central government employees ’ and pensioners’ inflation -busting wage hike will all support economic growth. GST will streamline India’s byzantine tax structure which, as well as boosting the economy, promises to make gold’s value chain more transparent. Further ahead, the economy will benefit from the groundswell of young Indians entering the workforce – a demographic dividend similar to that which underpinned the stellar growth of the Asian Tiger economies of the 1980s and 1990s. All these factors will boost India’s economic growth and support gold demand."
Another positive factor for Indian gold demand is the unintended consequence of Modi's demonetization scheme, which according to WGC has "tested some peoples’ faith in fiat currencies and reinforced their faith in gold." The council quotes its 2016 survey in which 63% of respondents in India agreed with the statement “I trust gold more than the currencies of countries.” And 73% of respondents in India agreed with the statement “gold makes me feel secure for the long-term.”