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Falling demand for gold is good for the economy

While demand has been hurt by elevated prices and a slowing economy, it also indicates consumer interest may be shifting to other saving instruments.

The 66 per cent fall in gold imports in the July-September 2019, from a year ago as well as from the previous quarter, is a welcome development for the economy and particularly for the country’s import bill, given that gold is the second largest item of import by value. The World Gold Council had estimated that net imports of gold by India in that quarter were just 80.5 tonnes, compared to 247.4 tonnes in the April-June 2019 quarter and 236.8 tonnes in July-September 2018. Lower demand has brought down the import bill for the metal by about 10 per cent to $15.8 billion in the first half of the fiscal year, from a year ago, despite nearly 13 per cent increase in average prices from the January-March 2019 quarter to July-September 2019 quarter. The share of gold in the import bill for the April-September 2019 period stood under seven per cent. When India’s gold demand was peaking in 2011-12, the share of gold in the import bill had risen to about 11.6 per cent. Even a small fall in the import bill for gold is good, and particularly so when global oil prices flare-up.

The fall in demand, however, is not as dramatic as the fall in imports, even though consumer sentiment was muted by slowing economy and elevated prices. Consumer demand fell 32 per cent in the July-September 2019 quarter, from a year ago, compared to the 66 per cent fall in imports. While some proportion of the demand must have been met by consumers trading in old jewellery, coins and bars, it is likely that the fall in imports is an overestimation. This is because it is an accepted fact that the inflow of gold through unofficial channels surges whenever import tariffs are increased, and inflows through official channels drop. The government had increased import tariffs on gold from 10 per cent to 12.5 per cent in July 2019, at a time when gold prices were rising globally. Therefore, that increase in duties may have hurt the government’s revenue rather than help. The government would do well to keep tariff moderate and stable for items such as bullion where small change translates to a significant change in prices. A small portion of the fall in demand for physical gold is also the result of investors turning to various gold-backed saving instruments such as gold bonds as against buying coins and bars to diversify their investment into different classes of assets. This is a good development and the government would do well to encourage investors to actively consider such instruments.

Courtesy - Hindu Business Line



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