Economic jitters? Gold imports surge 85% 

Portfolio investment (foreign investments in Indian stock or bond markets) was hit, as foreign investors withdrew Rs 11,000 crore ($ 1.6 billion) in January 2016 from Indian markets. In the same month, Indians bought gold worth Rs 20,000 crore ($2.91 billion) from the international market. Gold imports make Indians feel safe, stable, but the economy is destabilised

India’s gold imports surged 85 per cent in January 2016, indicating how, as stock markets decline and some economic indicators worsen in the run-up to Finance Minister Arun Jaitley’s third budget, Indians are falling back on a traditional mode of holding wealth.

It is reasonably clear that Indians, who hold around 20,000 tonnes of gold about a tenth of all the world’s gold and a fourth of current global gold demand — are reluctant to convert the gold they store into money or other forms that could benefit the economy.

In 2015, the government started a Gold Monetisation Scheme a revamped version of an older Gold Deposit Scheme to make idle gold productive, by getting consumers to either sell their gold or store it with banks, so it could emerge into the formal economy and reduce the country’s gold imports.

But, only 900 kg of 20,000 tonnes, or 0.0045 per cent of India’s idle gold, emerged; one per cent of gold so “monetised” could release Rs 54,000 crore (almost $8 billion) and strengthen the Indian banking system.

The 20,000 tonnes of gold, held privately by individuals and temples, is valued at Rs 54 lakh crore (at the current price of Rs 2,690 per gram), three times the revenue expenditure of Rs 17.77 lakh crore in union budget for 2015-16.

Gold imports rose to $2.91 billion from $1.57 billion in January 2016 over previous year, according to the ministry of commerce. Indians like gold’s stability in an increasingly unstable world.

The demand for gold has coincided with some weakening economic indicators. For instance, exports declined 17.7 per cent from April 2015 to January 2016, the weakest export performance since 2000; the previous low was a 3.5 per cent decline in 2009-10.

The year (April 2015 to January 2016) also saw imports decline 15.5 per cent, the greatest fall in 15 years. The previous largest decline was 8.3 per cent in 2013-14. Subdued global demand over the past three years “reverse globalisation” as NIPFP’s Bhanumurthy put it has resulted in currency devaluation of emerging economies. Combined with falling oil prices, world trade has slackened.

Although India anticipates an economic growth rate between 7 per cent and 7.5 per cent higher than China’s market volatility has also increased, jeopardising future growth. Investors are shying away from equity markets. Stock markets across the world plunged in early 2016. Foreign investments in India, both direct and portfolio, are declining.

Portfolio investment (foreign investments in Indian stock or bond markets) was hit, as foreign investors withdrew Rs 11,000 crore ($ 1.6 billion) in January 2016 from Indian markets. In the same month, Indians bought gold worth Rs.20,000 crore ($2.91 billion) from the international market. Gold imports make Indians feel safe, stable, but the economy is destabilised

“Large gold imports are adversely impacting the current account deficit (imports of goods, services and investments minus exports; a trade deficit),” said a draft report of a Reserve Bank of India working group to study issues related to gold and gold loans by non-banking finance companies. “There is a need to moderate the demand for gold imports, as ensuring the external sector’s stability is critical.”

Domestic demand and imports are “price inelastic”, which means Indians buy gold for household use irrespective of the prices in Indian and international markets, the report said. An import duty of 10 percent, imposed in 2012, raised the cost of gold 10 per cent over the year, but failed to moderate demand for gold, said an RBI report, which recommended “innovative financial instruments” to draw gold out of private holdings.

Sovereign gold bonds, which are government bonds acting as substitute for physical gold, were first sold in November 2015, receiving a subscription of Rs 246 crore. The second round, in February 2016, tripled the first round by attracting Rs.726 crore. The overall economic uncertainty is also reflecting in gold imports.

The January jump in gold imports has now transformed into a February slump, with trade associations, such as the All India Gems and Jewellery Trade Federation and the India Bullion and Jewellers Association, recommending that the finance ministry reduce the import duty on gold from 10 per cent to two per cent.

Feb imports may plunge

India`s imports of the metal are expected to drop to 25 tonnes in February, according to a median of estimates from five industry participants, including bank dealers and traders. That would be about 67 percent below month-ago levels and the lowest since September 2013, when arrivals were hit by a government mandate to export a fifth of all gold imports.

"Banks and trading agencies have scaled down imports. They are being forced to offer heavy discounts (to global prices) to clear inventory," said Bachhraj Bamalwa, director at All India Gems and Jewellery Trade Federation, pointing to weak demand. Global spot gold prices hit a one-year peak of USD 1,260.60 an ounce this month amid volatile financial markets, and are currently at USD 1,216.

Prices have risen 15 percent over two months, their biggest such rally since August 2011. Dealers in India are offering record high discounts of up to USD 50 an ounce to the spot benchmark to lure buyers, but there are no takers, the industry participants said. Jewellers and retail consumers are delaying purchases in the hope prices will correct and that India will cut its import duty by 4 percentage points in this month`s budget, said Sudheesh Nambiath, a senior analyst at consultancy Thomson Reuters GFMS.