India’s rising demand for gold is a major issue for the US. There are several reasons for this, including increased incomes, the smuggling routes, and the monsoon season. Let’s take a look at a few of them.
Increased incomes
There are two reasons why the Indian economy has a rising demand for gold. The first is a growing middle class. Currently, there are less than 50 million people in India in the working age category, and that population is expected to rise by seven million per year between 2021 and 2041. The second reason is an emerging strategic interest in gold. Combined, these factors will likely cause gold prices to rise.
Lastly, rising gold prices are not a permanent feature of the economy. Historically, gold has performed well in an environment of rising prices. It has increased by nearly 7% when inflation reached 7% or higher in the past. The monetary authorities in the US, UK, and India are doing everything in their power to tame inflation.
Rising inflation
Rising gold demand in India has sparked fears of inflation and lower disposable incomes. But it’s not all bad news. The country’s trade deficit and current account problems have also weighed on the value of gold. The government is using the import duty to control imports. And while higher prices depress demand, low interest rates encourage investments in the precious metal.
The country’s annual inflation rate is still above 7%, exceeding the central bank’s tolerance range. Rising local gold prices and higher import duty will hit the country’s demand for gold. However, despite the negative factors, gold demand in India increased 43% in a year. The country’s holy festival Akshaya Tritiya helped jewellery sales, as gold is considered auspicious.
Smuggling routes
India’s growing gold demand has resulted in the smuggling of gold into the country. It is estimated that between 100 and 120 tonnes of gold a year enter the country illegally. Gold smugglers often pay fishermen to act as their agents, allowing them to avoid detection. These transactions are difficult to trace, but the Indian customs department foiled a recent attempt to smuggle gold from Sri Lanka into India through the country’s ports. Additional security forces have been deployed on the border to prevent this smuggling activity.
Until the Covid-19 pandemic, the majority of gold smuggling in India came through the land route. However, this method has been increasingly replaced by sea and air routes. In the past, gold was mainly smuggled into India via Middle Eastern nations. However, this has changed in recent years, with the arrival of new laws that make it more difficult to import gold from the Middle East.
Monsoon season
The monsoon season in India is expected to improve this year, which should lead to a resurgence of gold demand there. In the first half of June, nearly 12 inches of rain fell across the country, the fifth highest amount in nearly 30 years. This should help farmers, who have been severely affected by two years of drought. It is also expected to boost gold demand in the second half of the year. The monsoon is also related to India’s incomes, and good monsoons can help boost gold sales in the country.
In the first half of 2016, India’s gold demand sank to its lowest level in seven years. However, the monsoon season will help spur rural demand, especially during festive seasons. Two-thirds of India’s gold demand comes from rural households. Most people in rural areas buy gold jewellery as an investment, but recent back-to-back droughts have depressed rural demand. If India’s monsoon season continues to boost demand, it should support global bullion prices.
Lower tax rates
Gold demand in India is fueled by the rising income of the people. Government policies like the 80:20 rule have also led to a spike in gold prices in the local market. Moreover, a recent government plan to increase farmer incomes will further push gold prices up. As a result, a high price of gold in the country is negatively affecting the country’s economy.
The Indian government is now trying to control the price of gold in its country. To reduce its trade deficit, it raised its basic import duty on gold to 12.5% from 7.5%. This decision is likely to further increase gold prices in India. Meanwhile, the Trade Ministry has recommended suspending the import of cheaper gold jewellery from Thailand. The Reserve Bank of India is also looking at regulating gold coin and wealth management products offered by banks in the country.
Rising equity markets
Indian investors are turning to gold for investment purposes, with a growing demand for the precious metal in the country. India imported nearly $5 billion worth of gold in Q2 of this year, up almost 5% from a year ago. The increase was largely driven by the rising price of gold, rising equity markets, and rising inflation expectations.
The recent volatility in equities and other assets has driven a high demand for gold as an investment. The value of gold can grow at a faster rate than the cost of producing it, resulting in greater returns. Rising gold demand is also driven by geopolitical issues, including the war in Ukraine which has impacted global supplies of key agri-commodities. As an alternative asset class, gold has the advantage of being remarkably liquid, and has a negative correlation with equity markets. Therefore, it can provide a more stable investment portfolio than the stock market or bonds