Will Indian gold consumption recover?

Aug 9, 2016 - 2:30 PM GMT

How India will address issues that have roiled the market this year will be the question many will ask at this week’s Indian International Gold Convention in Agra.

Several political and economic issues this year threaten the country’s position as one of the two leading gold-consuming nations – the other is China.

Last year, India consumed 668.5 tonnes of jewellery, according to Metals Focus’ annual report, up six percent from 632.2 tonnes in 2014 and 615.7 tonnes in 2013. This compares with 753.4 tonnes in China and overall global consumption of 2,397 tonnes.

First-quarter jewellery consumption in India at 72.9 tonnes was down from 148.5 tonnes a year previously, analyst GFMS estimates, while in the second quarter it fell 56.3 percent to 69.2 tonnes from 158.2 tonnes

Imports of refined bullion have collapsed under the weight of large domestic inventories held by jewellers, bullion banks and even refiners, amid a lack of consumer interest.

Huge import figures late last year and hefty domestic doré refining capacity have boosted stockpiles – the country imported 904 tonnes of gold last year on a gross basis, the highest since 2012, GFMS estimates.

Some refiners – including the largest and only LBMA-recognised refiner in the country, MMTC PAMP – have even been forced to stop producing metal and focus instead on drawing down large stockpiles.

And higher prices and around two years of poor rains have hit consumer confidence, which despite better monsoon forecasts for this year shows no signs of improving.

Debt among farmers is a particular factor – agriculture accounts for two-thirds of domestic gold consumption – because of consecutive poor monsoon seasons. So good rains may not be enough for India to achieve its forecast consumption.

About 25-30 percent of India’s overall consumption is reliant on monsoons, Metals Focus said recently.

“The severe drought of the previous two years has resulted in elevated levels of rural debt… any rise in income would first be used against this debt, with only the surplus then used to buy gold, most likely during November and December,” it added.


Attempts by authorities to change consumer habits and monetise hoarded gold has bolstered the black market trade.

As well as high import tariffs and excise duties on jewellery, the government has tried to entice people and temples to hand over gold in exchange for interest-rate returns.

In March in particular, jewellers embarked on a 42-day strike following the announcement of a one-percent excise duty on all gold jewellery sales and no change to the 10-percent import duty that has been in place since 2013.


Trade in unrefined unwrought gold bars – gold doré – has collapsed, due to recent changes to the import duty differential between doré and refined metal.

Refiners on long-term supply contracts from Africa and South America are being forced to redirect shipments to buyers in Europe and Dubai – the incentive to import unwrought material, refine it cheaply and sell into the domestic market has been cut to just 0.5 percent from one percent, although this can differ should the refiner operate in an Excise Free Zone (EFZ).

Simultaneously, demand for refined metal is clearly suffering and stockpiles are high. Last year, the volume of gold refined from doré was 207 tonnes, according to GFMS, accounting for 29 percent of domestic supply.

While New Delhi is willing to work with the industry to develop the marketplace, it will not reverse its decision on excise while it bids to crack down on the black market.

Some refiners have reportedly shuttered operations, but many will need to find a way to remain competitive with imported bullion and indeed have a liquid marketplace. GFMS estimated in its 2016 Gold Survey that there were around 30 refiners – 21 of which are located in the EFZ – using their import licenses to import doré. Before February’s budget, the doré purchasing space had become so competitive that refiners were willing to pay high prices to prise metal away from the usual destinations in Dubai, Switzerland and South Africa.


Gold discounts are around their highest on record and forecasts for jewellery consumption may well prove to be wide of the mark unless some stability returns to the sector by the time the monsoon rains end and important Hindu festivals arrive in October and November.

Outside of India, gold’s price gains since the Brexit vote have been well documented but physical demand in India and China has been lacklustre, raising doubts over whether or not this year’s forecasts for supply and demand may well be affected.

Still, India still consumes huge volumes of gold every year – to the point that the Reserve Bank of India has set up a committee to study household financing patterns and to find out exactly why its people spend so much of their money on gold.

A key element of the gold industry to the outside world is the balance between supply and demand – a decrease in annual consumption from one of the world’s most important consumers of the metal is likely to have a significant impact on the market’s balance.

This year’s IIGC thus comes at a perfect time with such an important phase of India’s annual consumption coming up with a number of Hindu festivals including Diwali, which will be crucial for the country’s gold industry.

 (Editing by Martin Hayes)