Why Indians Love Gold

When you think of Gold you think of India—world's largest consumer of Gold. Official Gold imports into India are estimated at 700 tonnes for 1998. This figure is based upon data collected from gold importing banks, official bodies and declared imports by non-resident Indians. This figure does not include gold jewelry imported by Indians returning after foreign travel and Gold smuggled into India.

Prior to 1992, official import of gold into India was banned except against value added export of jewelry. Even Indians returning from foreign travel were not even allowed to bring in jewelry in very small quantity for personal use. The only channel for import was smuggling. In 1992 the government liberalized its policy and permitted "non-resident Indians" to bring in 5 kilograms of Gold per person on payment of import duty in hard currency at a reasonable rate of about 7% of the gold price. The import policy has been further liberalized to allow 10 kilograms per person.

The above chart of Gold demand in India may not be exact because official import figures were not available prior to liberalization of the Gold import policy in India. For the same reason the growth between 1997 and 1998 may be exaggerated.

From time immemorial Indians have been in love with Gold. The predominant Hindu population finds mention of gold as a commodity of immense value in their religious books. Some of these religious books like the "Vedas, Puranas, Upnishads" are believed to date back a few hundred thousand years. The revered "GITA" is believed to be a sermon by Lord Sri Krishna given more than 5000 years back. In most religious books there is mention of gold as a metal of immense value. Hindus believe that Gold is a metal of demi-Gods and monarchs.

From ancient times Gold (and gold jewelry) has enjoyed safe-heaven status.In India Gold continues to enjoy safe heaven status even today. Gold jewelry is worn by all women irrespective of their religious beliefs. A large number of Indian men also wear Gold jewelry as neck chains, bracelets, and rings (on fingers). Gold jewelry is popular among Indians for the following reasons.

1. Jewelry is worn for ornamental value on all social functions, festivals and celebrations.
2. At one point in time there was 97% income tax in India. This resulted in large scale tax evasion. Large population spread over a significant area and lack of adequate computerization are some other reasons for tax evasion. The tax reforms of the last several years have indeed reduced the level of evasion. Still a lot remains to be done. It is believed that there is a parallel economy running in the country. The cash component of the unaccounted wealth can not be kept in Banks (if kept in Banks it would have to be accounted). This unaccounted wealth can not be kept in safe deposit vaults as it has to be hidden from the tax authorities. Gold jewelry is the most convenient option as it occupies very little space (so easy to hide) and does not have the risk of being damaged during storage.
3. The Indian rupee is not convertible on capital account. This means that it is illegal for an Indian (resident in India) to keep any foreign currency in his possession or in his portfolio. Foreign exchange regulation act (FERA) and conservation of foreign exchange and preservation of smuggling activities act (COFEPOSA) prescribe deterrent punishments for violators (including detention for long periods without bail or trial). It is also illegal to keep Gold in unworked form (pure gold). As a result, in the prevalent scenario, Gold jewelry is the only way to protect against depreciation of Indian rupee against US$.
4. A large population in India lives in villages. A large number of very poor people do not have proper houses to live. These poor people have very little assets. Whatever little they have they must keep in their possession 24 hours a day (as they do not even have a house to keep their belongings). Gold jewelry worn on their self is the only option. When in crisis they mortgage it or sell it. Floods and drought force many people living in villages to flee to a safer place. It is easy to carry gold jewelry while fleeing in distress.
5. In the long term the Indian rupee price of Gold has been in an up-trend. Inflation has continuously, year after year, eroded the value of currency. Real estate has been the best bet. Gold jewelry has been the next best option. Despite the fact that $ price of Gold has been in a bear trend, Indians continue to believe that Gold is a hedge against inflation. The following is the Indian rupee Gold price chart from 1993 onwards. The downward price movement from 1996 has been for two reasons. Firstly, $ price of Gold has gone down by 25% in the same period. Secondly, the Indian Gold import regulations have been liberalized. Some benefits of liberalization have been passed on to the consumers in the form of lower rupee prices.
6. Due to import duty and other limitation on imports, the price of Gold in India is always higher than the international price. Therefore, India continues to import Gold year after year.

There are about 8 million marriages in India every year. The following table estimates the amount of Gold jewelry (in gold equivalent) gifted to the bride. There are no official figures to confirm this estimate. This estimate is based upon inputs from a few knowledgeable individuals from various regions in India. A significant portion of gold jewelry gifted in marriages is part of purchases made in earlier years. It is common for parents of a girl child to start collecting gold jewelry for the girl's marriage from the time the child is born. In rich and middle class marriages, gold jewelry is also gifted to the near relatives of the bride and the groom.

From the above chart one may accurately conclude that the Gold demand in India cannot go down unless the psyche of the Indians undergoes a sea change—a very unlikely event in the next few decades.

Gold jewelry is very popular among farmers. After a bumper crop one notices a spurt in the sale of gold jewelry. There are festivals all over India that mark the beginning or the end of the harvest season. There are also many religious festivals. These festivals are celebrated with lot of fun and gaiety. All affluent men gift new jewelry to their wives and daughters.

The following are some additional reasons that contribute to the consumption of Gold in India. The consumption due to these reasons is very small but it gives an insight into the psyche of Indians.

• When a new house is constructed many people embed a few grams of Gold at the foundation level. This is considered very auspicious.
• When a person dies, a small quantity of Gold is placed in his/her mouth at the time of funeral. This Gold is lost forever. Strange yet true!!
• Silk dresses worn by rich women contain Gold threads in embroidery.
• Some Ayurvedic Medicines contain Gold in very small quantities.
• Gold foil is used in preparation of some high class food items as sweets made from milk, pistachio, cashew nuts, etc.
• Gold jewelry is used to decorate idols of Gods and demi-gods.
• Gold is gifted to priests who perform religious ceremonies.

Despite the sanctions imposed on India for not signing the CTBT and conducting nuclear tests, India was able to collect US$ 4.16 billion from non-resident Indians. This gives an indication that the overseas Indians continue their faith in the Indian economy. It also tells us that overseas Indians have a lot of money. These overseas Indians have been the source of the hard currency required for imports of Gold into India. Also, India is fast becoming a major player in the computer software market. Indian engineers are highly rated. With prosperity among the overseas Indians, one can expect the Indian Gold demand to remain high.

US$ Gold prices have been going down for more than 2 years now. With the problems facing the currency and stock markets all over the world and a billion Indians supporting the demand for Gold, isn't it time for the GOLD BEARS TO WATCH OUT?

 

Sunil Madhok

[email protected]

14 October 1998