In 2015 India was the world’s fast growing economy; in recent years millions have been lifted out of poverty and India’s middle class has swelled. This is important because our econometric analysis indicates income growth drives gold demand. But India’s relationship with gold goes beyond income growth: gold is intertwined with India’s way of life. And as we look ahead, India’s gold market will evolve.

Introduction

India is a wonderful country. It is diverse and dynamic. With over 500 million people under the age of 25 it is one of the youngest countries in the world. Yet, at the same time, India has a long and rich cultural heritage, with many gods, deities and beliefs intertwined with the Indian way of life.

Gold is part of this way of life. Hundreds of millions of people across India – from large, modern cities through to small rural villages – buy gold for themselves or loved ones throughout the year. Akshaya Tritiya, Diwali, harvests, weddings; gold is central to every one of these. Perhaps its little wonder India has a huge affinity for the global currency, given its long history as a trading nation.

But India is changing. Millions migrate from villages to cities every year. Agriculture’s relative importance has declined. Per capita income has increased and millions have been lifted out of poverty. Mobile phones have spread rapidly across the country; with over 220 million users, India is the world’s second largest smartphone market. Millennials think about the world differently to their forefathers. These changes have implications for gold demand.

On top of that, India’s gold market has been subject to huge policy changes over recent years. Sometimes this targets the gold industry, such as the market-distorting 80:20 rule for gold imports in 2013 and 2014. But sometimes it is an economy-wide initiative, such as the forthcoming Goods and Services Tax or 2016’s radical high value currency exchange (or ‘demonetisation’) programme. While recent new policies initiatives have been numerous and varied, they share the same objective: to move India’s informal cash economy towards greater transparency and into the digital age.

A challenge facing India’s gold industry is that part of it operates in the grey market. This minority has benefited from anonymity and a lack of transparency on price, purity, taxes and supply sources. As India’s economy presses ahead with its transition to transparency, its gold industry must shed this image and integrate into the mainstream financial system, for gold to serve as a legitimate asset class for millions and play a dynamic economic role.

It is clear that India’s gold industry is important to its policymakers. But effective policy needs good data and insight as its foundation. This report aims to provide that, by explaining how India’s gold market works across the entire supply chain – from imports and recycling through to consumer demand – and how it is likely to evolve in the coming years. It also provides an overview of existing gold-related policies and how they have evolved over recent years.

Key insights

  • Economic growth drives gold demand: India was one of the world’s fastest growing economy in 2016. This is key to the health of the gold market. Our econometric analysis of the drivers of Indian gold demand reveals income growth is the most significant factor: as India becomes richer, gold demand increases.
  • Urbanisation will change the shape of consumer demand: Rural and urban India can be thought of as two distinct markets. Rural India prefers to invest in gold jewellery, while urban India has a greater preference for bars and coins. Rural-to-urban migration will change the shape of consumer demand.
  • India has a young population with a strong affinity with gold: India has over 45% under the age of 25. And young people think about the world differently from previous generation. But our large-scale consumer research indicates that they do have a strong affinity with gold: when we asked the question what you would buy if you were given Rs50,000, a third of respondents aged between 18–33 said they would invest in gold.
  • India’s gold industry is becoming more organised: While it is still highly fragmented, the industry is becoming more organised. Retailers with large regional and national chains are gaining market share. These firms have sophisticated inventory management, well-crafted advertising campaigns and will be important in ensuring gold meets the needs of modern consumers.

At the World Gold Council, we want to support the development of India’s gold industry by working with India’s policymakers to help ensure gold becomes mainstream, and that its positive role in household finance is better appreciated. Currently, policy discussions tend to focus overwhelmingly on import controls, thereby under-leveraging the strengths of a gold culture that is widely prevalent. Policies to enable gold to operate freely in a transparent manner, as part of the organised financial system, are important to realise the broader social and economic objectives. We hope this report provides the data and insight from which effective policies can be developed.

Somasundaram PR

Managing Director, India

World Gold Council

Overview

In 2015 India was the world’s fast growing economy; in recent years millions have been lifted out of poverty and India’s middle class has swelled. This is important because our econometric analysis indicates income growth drives gold demand. But India’s relationship with gold goes beyond income growth: gold is intertwined with India’s way of life. And as we look ahead, India’s gold market will evolve.

Income growth drives gold demand

India’s middle class, consisting of some 200mn to 250mn people, is now one of the world’s largest. The India-based National Council of Applied Economic Research expects this number will exceed 500mn by 2025, while the US-based Brookings Institution reckons India’s middle class consumption will be ahead of the US and China by 2030 (Chart 1).

India's Gold Market

India

This is important because India’s economic growth has underpinned its gold market. Our econometric analysis of data from 1990 to 2015 revealed that income levels are the most significant long-term determinant of consumer gold demand: holding all else equal, a 1% rise in income boosts gold demand by 1%. Of course, other factors play a role too. Rising prices, taxes and other barriers can put consumers off, while a good monsoon can boost demand. But income is the dominant macro-economic factor supporting India’s gold market.

Consumer demand is evolving

Econometric analysis, while helpful, can only tell you so much. India’s relationship with gold is much richer, deeper and more complex than mere macroeconomic variables.

For large swathes of the population, gold is intertwined with their way of life. It is deeply rooted in Indian culture: gold purchases are driven by tradition, festivals and other important family and societal occasions. Our 2016 consumer research conducted by TNS identified the top three gold purchase occasions in India to be weddings (24%), birthdays (15%) and religious festivals (12%). Agriculture also plays a significant role in gold demand. Although it only contributes 17% to Indian GDP, it is integral to the rural economy, which accounts for over two-thirds of the population. Finally, there is religion. Gold is seen as a symbol of wealth and prosperity in the Hindu religion. Given all of this, it should come as no surprise that 72% of survey respondents said that

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