Even as economists beg them not to, Indians splurge on the shiny stuff. Dr. Charan Singh, RBI Chair Professor of Economics, and his students at IIMB, suggest ways to address the issue of surging demand for gold, with the restriction of limited supply
Professor Charan Singh and his team of eight students - Sayan Das, Akshat Kumar Sinha, Apurva Suhas Nadkarni, Atirek Kumar, Jayanta Kumar Sardar, Samir Jain, Shubham Agrawal and Surbhi Shukla - share insights about gold buying trends in India. A Working Paper on their findings and suggestions will be released soon.
India shares a unique relationship with gold, one that is complex and intriguing. Right from the time a child is born to the time of marriage gold finds a place in all the rituals and traditions, social and religious. Almost every Indian, rich or poor, living in city, town or village, is a potential first-time buyer or, in most cases, a repeat buyer.
While the sources of gold are limited, the gold market size has been rising in India, with soaring prices. The consumer demand for gold in India annually was around 660 tonnes in 2008, which went up to 975 tonnes as against the world total of 3,863 tonnes in 2013. Satisfying such rising appetite for gold is not easy. The import bills of the country, on account of gold have also been high in the recent years, up from USD 16,724 million in 2007-08 to USD 53,819 million in 2012-13.
Although measures to curb gold imports have helped in reducing the same during 2013-14, overall this is not healthy for the industry, as there have been occurrences of imports getting routed illegally. The important question now is about how long these restrictions can be continued with, and further, how the situation would be, when such restrictive controls would be lifted.
According to you, what are the main factors that trigger demand for gold in India?
There are numerous reasons for buying gold in India. Some of these are:
- Gold is considered as a symbol of purity, prosperity, good luck, status and wealth
- Gold purchases serve a two-fold purpose: that of an ornament and an investment
- Gold has festive, religious and also sentimental significance, as it's often passed on over generations
- Absence of a close substitute to gold as an investment asset
- Feature of hedge against inflation
- Gold has high liquidity
- A simpler investment, as against complex financial instruments, especially for the rural areas
- Since generally gold has no "irritants" like tax deducted at source during sales and purchase, the investors presume there is no need to pay any capital gains tax while dealing in gold.
Please elaborate on the nature of demand for gold, in the Indian context.
Based on personal interviews with 15 retailers, four focus group discussions, visit to showrooms of leading jewellers including Tanishq, in Bengaluru and Mumbai and, interactions and discussions with professionals and trade associations, some observations include: [1]
- Most women, from both traditional and contemporary families, consider gold as a primary investment option
- While most traditional women prefer to buy gold jewellery, a growing population of young women are moving away from the traditional idea of buying gold jewellery but buying gold bullions and gold bars
- Increasingly, younger population is preferring studded jewellery over pure gold jewellery
- Almost all women in the survey indicated that they do not prefer to sell gold. They prefer using other options such as fixed deposit for need of money in times of distress. Gold also gets gifted/ passed on to generations, hence a tendency to save gold is observed to be much more among people with children than those without a child.
[1] 15 retailers (Divided across 3 segments: retailers for affluent to higher middle income group, higher to lower middle income group, and small retailers on Bannerghatta Road, Bengaluru); 4 Focus group discussions (3 targeting women in 25-40 years age group; one group targeting married men in same age group); Visit to Tanishq showroom and Karighar park in Bengaluru; Interaction with Shri G Srivastava, President, Foretell Business Solutions Pvt Ltd; Discussion on consumer perceptions with Mr. Somasundaram (MD, India - World Gold Council), Mr. Rajesh Khosla (MD of MMTC-PAMP India Pvt. Ltd.) and Mr. Subramaniam
Retailer insights from interviews
- Form: Stores usually sell gold coins in the range of 1gm-10gm and in biscuits form (25gm-1000gm). As can be expected, the times of increased sales include New Year, festival times and auspicious occasions.
- Regional aspect: There is a regional variation in the demand for gold, wherein the demand is higher in the southern part of the country. While people in north prefer studded gold with precious stones, there is not much focus on jewellery in the north-east.
- Household gold resale: 2-3% of customers come to sell gold. Typically, this is done either for a financial emergency or for real estate investment but generally more with affluent customers.
Geographical trends: Bengaluru vs Mumbai in primary research
Through retail visits and customer interviews, again based on a small sample, it was observed that:
- Impact of the cosmopolitan culture and multi-regional population is reflected in the taste and preferences of consumers in Mumbai
- Young couples moving to Mumbai for work mostly live in rented homes. Lower investment in real estate translates to more gold purchases compared to the same consumer segment in Bengaluru
- Designer jewellery with semi-precious stones is gaining popularity among modern buyers. Still, pure gold forms a major portion of jewellery sales in Mumbai, particularly among the middle and lower middle class and during wedding purchases. The demand for pure gold jewellery with traditional designs is higher in Bengaluru. Although there is an observable trend towards modern designs, the volume is much lower in Bengaluru than in Mumbai
- Overall, in Mumbai, preference for traditional stores is more (possibly due to a large middle-class population) while in Bengaluru, preference for branded stores is greater (possibly due to the young IT population). Perhaps, for similar reasons, impulsive buying seems higher in Bengaluru than Mumbai. Although, overall, majority of purchases are planned purchases in both cities
- As the business community in Mumbai is large and affluent, investment demand for gold is very high
- The lower-income group also invests in gold, though in small amounts. Also, the frequency of taking loans from local money lender against their gold jewellery is very high among people in this income group
As per our findings based on a small sample survey and discussions with experts, rising gold prices have really not adversely impacted the demand for gold in India. The main reason is that while higher income groups can diversify their investment portfolio in accordance with the risk-return trade off, others depend more on commodities like gold and silver. The poor also pledge or sell jewellery bought with savings during emergencies. The segment of the population facing borrowing constraints have incentives to purchase more gold jewellery during times of prosperity, as insurance, to use as a collateral during times of distress. The surge in demand witnessed during 2011 and 2012 clearly substantiates the argument that gold is purchased as a hedge against economic uncertainties.
Could you suggest ways to address the issue of surging demand for gold, with the restriction of limited supply?
Based on overall analysis of the gold scenario in India, the survey conducted, and the interactions with organised retail outlets, small-scale jewellery retailers and pawn brokers, we have some suggestions:
- Ensure macroeconomic stability and stability in the price level
- Government should design policies to ensure a stable and sustainablegold market. Focus should be on better policy regulations which could improve the supply side and overall economics of the gold market
- A medium-term roadmap of regulations may be considered, post deliberation and consultation, from all stakeholders in the value chain
- Monetizing gold stocks : Developing a financial micro-structure
The idea is to develop a microstructure for monetizing gold wherein consumers are incentivized to deploy their gold holdings into the financial system and banks are incentivized to actively seek such deposits. A multi-tier structure is proposed for managing and monetizing of gold holdings in India. The different aspects of this structure could be:
o Creation of Gold Corporation of India: Monitoring imports and becoming the single point of contact for incoming/outgoing gold
o Include jewellers as an integral part of the micro-structure: Recycling of gold through jewellers
o Enhance the role of banks in the monetization process: Recycling of gold through banks
- Inclusion of gold in list of CRR of banks
In order to incentivize people to invest into gold deposit accounts, it is important to incentivize banks to rigorously pursue potential accounts. One such way to incentivize banks is to allow them to hold Gold as part of their CRR investment portfolio. This will allow the banks to free up more of their deposits and extend more credit. Although gold is an eligible SLR security, investment in gold has been close to negligible. This is primarily because the return on gold is essentially notional, whereas banks could actually invest in higher yielding G-Secs. This is a major reason behind low SLR investment into gold. Including gold in CRR will enable banks to extend more credit for the same deposit base, thereby incentivizing them to actively seek out more gold holdings.
- Incentivize consumers to park gold with banks/jewellers
- Voluntary Disclosure Schemes: Given that a substantial amount of gold savings in India are unaccounted, citizens could be unwilling to part with the gold savings. One solution to monetize gold effectively could be to allow for voluntary disclosure.
- Jewellery-for-Jewellery Scheme: Since the crux of the monetization architecture depends on re-deploying gold tied in the form of jewellery, thus it is imperative that banks, in collaboration with jewellers, devise a scheme whereby at a redemption date, the jeweller will compensate the depositor with 'similar value-added' jewellery as the melted (deposited) jewellery.
Ensuring process standardisation and optimal quality assurance for gold jewellery Hallmarking and process standardization must be mandated in the organized retail sector with strict regulations and policy checks. To mitigate challenges of the unorganised sector, the government should initiate awareness programs to communicate the essence of hallmarking and strengthen stakeholder confidence.
- Better policy implementation to ensure recycling of temple gold
A well-defined code of law of asset transfer should be enforced to win back the trust of temple boards for bringing their gold reserves back into the economy. Enforcement of such laws should also take care of the accountability factor during inter-party asset transfer.
- Ensuring effective labour law and investment in infrastructure and human resources
Government should allocate additional funds to improve the infrastructure facilities of central and state-run 'karigaar' parks and training centres for enhancing the skill and competency level of gold artisans. This would improve the productivity of the sector and generate more employment.
- Primary research suggests that products analogous to Inflation Indexed Bonds should be considered as alternatives. Products that have already been suggested in existing research, such as Modified Gold Deposit Schemes, Gold Accumulation Plans and Gold Linked Accounts, are good alternatives to monetize gold. However, such schemes are not successful in garnering customer trust right now. An assessment of the viability of introducing each proposed gold-backed product with the focus groups was conducted. Some suggestions to ensure wide scale acceptance of the schemes are:
- Standardised purity verification process by a government-certified agency
- Simplified procedure for enrolment
- Facility to view the gold holding statement online
- Flexibility to withdraw the deposit as gold or cash on demand
- Lower the minimum cap on the deposit (to make the scheme more socially inclusive and to encourage people who are sceptical to also invest in the scheme)
Even as economists beg them not to, Indians splurge on the shiny stuff. Dr. Charan Singh, RBI Chair Professor of Economics, and his students at IIMB, suggest ways to address the issue of surging demand for gold, with the restriction of limited supply
Professor Charan Singh and his team of eight students - Sayan Das, Akshat Kumar Sinha, Apurva Suhas Nadkarni, Atirek Kumar, Jayanta Kumar Sardar, Samir Jain, Shubham Agrawal and Surbhi Shukla - share insights about gold buying trends in India. A Working Paper on their findings and suggestions will be released soon.
India shares a unique relationship with gold, one that is complex and intriguing. Right from the time a child is born to the time of marriage gold finds a place in all the rituals and traditions, social and religious. Almost every Indian, rich or poor, living in city, town or village, is a potential first-time buyer or, in most cases, a repeat buyer.
While the sources of gold are limited, the gold market size has been rising in India, with soaring prices. The consumer demand for gold in India annually was around 660 tonnes in 2008, which went up to 975 tonnes as against the world total of 3,863 tonnes in 2013. Satisfying such rising appetite for gold is not easy. The import bills of the country, on account of gold have also been high in the recent years, up from USD 16,724 million in 2007-08 to USD 53,819 million in 2012-13.
Although measures to curb gold imports have helped in reducing the same during 2013-14, overall this is not healthy for the industry, as there have been occurrences of imports getting routed illegally. The important question now is about how long these restrictions can be continued with, and further, how the situation would be, when such restrictive controls would be lifted.
According to you, what are the main factors that trigger demand for gold in India?
There are numerous reasons for buying gold in India. Some of these are:
- Gold is considered as a symbol of purity, prosperity, good luck, status and wealth
- Gold purchases serve a two-fold purpose: that of an ornament and an investment
- Gold has festive, religious and also sentimental significance, as it's often passed on over generations
- Absence of a close substitute to gold as an investment asset
- Feature of hedge against inflation
- Gold has high liquidity
- A simpler investment, as against complex financial instruments, especially for the rural areas
- Since generally gold has no "irritants" like tax deducted at source during sales and purchase, the investors presume there is no need to pay any capital gains tax while dealing in gold.
Please elaborate on the nature of demand for gold, in the Indian context.
Based on personal interviews with 15 retailers, four focus group discussions, visit to showrooms of leading jewellers including Tanishq, in Bengaluru and Mumbai and, interactions and discussions with professionals and trade associations, some observations include: [1]
- Most women, from both traditional and contemporary families, consider gold as a primary investment option
- While most traditional women prefer to buy gold jewellery, a growing population of young women are moving away from the traditional idea of buying gold jewellery but buying gold bullions and gold bars
- Increasingly, younger population is preferring studded jewellery over pure gold jewellery
- Almost all women in the survey indicated that they do not prefer to sell gold. They prefer using other options such as fixed deposit for need of money in times of distress. Gold also gets gifted/ passed on to generations, hence a tendency to save gold is observed to be much more among people with children than those without a child.
[1] 15 retailers (Divided across 3 segments: retailers for affluent to higher middle income group, higher to lower middle income group, and small retailers on Bannerghatta Road, Bengaluru); 4 Focus group discussions (3 targeting women in 25-40 years age group; one group targeting married men in same age group); Visit to Tanishq showroom and Karighar park in Bengaluru; Interaction with Shri G Srivastava, President, Foretell Business Solutions Pvt Ltd; Discussion on consumer perceptions with Mr. Somasundaram (MD, India - World Gold Council), Mr. Rajesh Khosla (MD of MMTC-PAMP India Pvt. Ltd.) and Mr. Subramaniam
Retailer insights from interviews
- Form: Stores usually sell gold coins in the range of 1gm-10gm and in biscuits form (25gm-1000gm). As can be expected, the times of increased sales include New Year, festival times and auspicious occasions.
- Regional aspect: There is a regional variation in the demand for gold, wherein the demand is higher in the southern part of the country. While people in north prefer studded gold with precious stones, there is not much focus on jewellery in the north-east.
- Household gold resale: 2-3% of customers come to sell gold. Typically, this is done either for a financial emergency or for real estate investment but generally more with affluent customers.
Geographical trends: Bengaluru vs Mumbai in primary research
Through retail visits and customer interviews, again based on a small sample, it was observed that:
- Impact of the cosmopolitan culture and multi-regional population is reflected in the taste and preferences of consumers in Mumbai
- Young couples moving to Mumbai for work mostly live in rented homes. Lower investment in real estate translates to more gold purchases compared to the same consumer segment in Bengaluru
- Designer jewellery with semi-precious stones is gaining popularity among modern buyers. Still, pure gold forms a major portion of jewellery sales in Mumbai, particularly among the middle and lower middle class and during wedding purchases. The demand for pure gold jewellery with traditional designs is higher in Bengaluru. Although there is an observable trend towards modern designs, the volume is much lower in Bengaluru than in Mumbai
- Overall, in Mumbai, preference for traditional stores is more (possibly due to a large middle-class population) while in Bengaluru, preference for branded stores is greater (possibly due to the young IT population). Perhaps, for similar reasons, impulsive buying seems higher in Bengaluru than Mumbai. Although, overall, majority of purchases are planned purchases in both cities
- As the business community in Mumbai is large and affluent, investment demand for gold is very high
- The lower-income group also invests in gold, though in small amounts. Also, the frequency of taking loans from local money lender against their gold jewellery is very high among people in this income group
As per our findings based on a small sample survey and discussions with experts, rising gold prices have really not adversely impacted the demand for gold in India. The main reason is that while higher income groups can diversify their investment portfolio in accordance with the risk-return trade off, others depend more on commodities like gold and silver. The poor also pledge or sell jewellery bought with savings during emergencies. The segment of the population facing borrowing constraints have incentives to purchase more gold jewellery during times of prosperity, as insurance, to use as a collateral during times of distress. The surge in demand witnessed during 2011 and 2012 clearly substantiates the argument that gold is purchased as a hedge against economic uncertainties.
Could you suggest ways to address the issue of surging demand for gold, with the restriction of limited supply?
Based on overall analysis of the gold scenario in India, the survey conducted, and the interactions with organised retail outlets, small-scale jewellery retailers and pawn brokers, we have some suggestions:
- Ensure macroeconomic stability and stability in the price level
- Government should design policies to ensure a stable and sustainablegold market. Focus should be on better policy regulations which could improve the supply side and overall economics of the gold market
- A medium-term roadmap of regulations may be considered, post deliberation and consultation, from all stakeholders in the value chain
- Monetizing gold stocks : Developing a financial micro-structure
The idea is to develop a microstructure for monetizing gold wherein consumers are incentivized to deploy their gold holdings into the financial system and banks are incentivized to actively seek such deposits. A multi-tier structure is proposed for managing and monetizing of gold holdings in India. The different aspects of this structure could be:
o Creation of Gold Corporation of India: Monitoring imports and becoming the single point of contact for incoming/outgoing gold
o Include jewellers as an integral part of the micro-structure: Recycling of gold through jewellers
o Enhance the role of banks in the monetization process: Recycling of gold through banks
- Inclusion of gold in list of CRR of banks
In order to incentivize people to invest into gold deposit accounts, it is important to incentivize banks to rigorously pursue potential accounts. One such way to incentivize banks is to allow them to hold Gold as part of their CRR investment portfolio. This will allow the banks to free up more of their deposits and extend more credit. Although gold is an eligible SLR security, investment in gold has been close to negligible. This is primarily because the return on gold is essentially notional, whereas banks could actually invest in higher yielding G-Secs. This is a major reason behind low SLR investment into gold. Including gold in CRR will enable banks to extend more credit for the same deposit base, thereby incentivizing them to actively seek out more gold holdings.
- Incentivize consumers to park gold with banks/jewellers
- Voluntary Disclosure Schemes: Given that a substantial amount of gold savings in India are unaccounted, citizens could be unwilling to part with the gold savings. One solution to monetize gold effectively could be to allow for voluntary disclosure.
- Jewellery-for-Jewellery Scheme: Since the crux of the monetization architecture depends on re-deploying gold tied in the form of jewellery, thus it is imperative that banks, in collaboration with jewellers, devise a scheme whereby at a redemption date, the jeweller will compensate the depositor with 'similar value-added' jewellery as the melted (deposited) jewellery.
Ensuring process standardisation and optimal quality assurance for gold jewellery Hallmarking and process standardization must be mandated in the organized retail sector with strict regulations and policy checks. To mitigate challenges of the unorganised sector, the government should initiate awareness programs to communicate the essence of hallmarking and strengthen stakeholder confidence.
- Better policy implementation to ensure recycling of temple gold
A well-defined code of law of asset transfer should be enforced to win back the trust of temple boards for bringing their gold reserves back into the economy. Enforcement of such laws should also take care of the accountability factor during inter-party asset transfer.
- Ensuring effective labour law and investment in infrastructure and human resources
Government should allocate additional funds to improve the infrastructure facilities of central and state-run 'karigaar' parks and training centres for enhancing the skill and competency level of gold artisans. This would improve the productivity of the sector and generate more employment.
- Primary research suggests that products analogous to Inflation Indexed Bonds should be considered as alternatives. Products that have already been suggested in existing research, such as Modified Gold Deposit Schemes, Gold Accumulation Plans and Gold Linked Accounts, are good alternatives to monetize gold. However, such schemes are not successful in garnering customer trust right now. An assessment of the viability of introducing each proposed gold-backed product with the focus groups was conducted. Some suggestions to ensure wide scale acceptance of the schemes are:
- Standardised purity verification process by a government-certified agency
- Simplified procedure for enrolment
- Facility to view the gold holding statement online
- Flexibility to withdraw the deposit as gold or cash on demand
- Lower the minimum cap on the deposit (to make the scheme more socially inclusive and to encourage people who are sceptical to also invest in the scheme)