For a poor country, India has expensive taste.
It is the world’s biggest importer of gold – a pricey habit that has taken its toll on the country’s current account deficit. So is the recent tumble in the gold price just what India’s economy needs?
As Jack Farchy and Dan McCrum wrote in the FT on Monday:
Gold’s drop since Friday to a two-year low of $1,355.80 a troy ounce is the sharpest two-day tumble since 1983, when the last gold bull market was unravelling… Gold has enjoyed a stellar run over the past decade. Prices surged more than sevenfold since 2001 to an all-time high of $1,920 a troy ounce in 2011, as investors turned to the metal as a haven from turmoil in the rest of the financial world.
Much brainpower has been used in analysing the cause of this fall. Banks have turned bearish on the commodity. Cyprus announced last week that it will sell off part of its reserves. And the US recovery made equities a preferable choice.
But in India, it is the consequences rather than the causes that are more interesting. The nation’s current account deficit, which reached a record 6.7 per cent of GDP in the three months ended in December, is widely considered the biggest concern for Asia’s second largest economy.
And India’s insatiable appetite for imported gold is at the heart of the problem. Demand for gold grew from 679 tonnes in 2008 to 975 tonnes in 2011, since when the pace of increase has slowed.
The government has tried to tackle the problem, raising import taxes and considering changing regulations so that less gold comes into India via the banking system. But the recent drop in gold prices could have provided the most effective fix. In a note to clients on Monday, analysts at Barclays said:
The drop in commodity prices, particularly in gold and crude oil, if sustained, could be a major positive driver for India. The immediate and most visible impact would be on the current account balance, which could improve by nearly 1% of GDP in FY 13-14.
Source: Barclays
The falling price of gold has already begun to affect imports. Bombay Bullion Association president, Mohit Kamboj, told the Press Trust of India: “The imports of the yellow metal is likely to be 25 per cent less [in April] than the corresponding month last year as the gold prices are declining steadily. Usually, when the prices drop traders hold back in anticipation of further decline, while they buy when prices rise with the fear of additional increase in rates”.
And India’s investors, who have been stocking up on the precious metal for years, won’t see this price drop as anything but good news. “A lot of investors have gold in their portfolio but they have physical gold coins or jewellery”, Kishore Narne, head of commodities at Motilal Oswal, told beyondbrics. “So this [price drop] doesn’t really destroy their wealth as fast as it would a derivative instrument. The proportion of gold in their portfolio is typically less than 10 per cent and lots entered gold in the last three to four years, so their purchase price is still below trading prices.”
Indians’ love for gold is, indeed, a peculiar phenomenon where price isn’t necessarily important. M Sunderdas and Sons is a jeweller on Colaba Causeway in Mumbai. The quiet tinkle of wind chimes in one corner and the slow smoking of incense draw attention to just how empty the shop is.
Abishek Pherwani, 35, who works in the shop, told beyondbrics that demand for gold is currently at 20 per cent of its normal levels as customers only buy when markets are flat. But it doesn’t seem that this drop in prices is bad news for those that have bought the yellow metal in recent years. Quite the opposite. Pherwani says: “We aren’t getting calls for selling, only for buying as this is being seen as a good opportunity to get into the market.”
