The Golden Paradox : India

June 26, 1997

India is the world's largest consumer of gold, but does not produce any gold of its own. The ever increasing demand for the precious yellow metal, subject to high import duty, is fueling a multi-million dollar gold smuggling racket.

India's history and myth are a glitter with gold and jewels. Rumor has it that in the oldest South Indian temples, the inner sanctum brims with gold offered in devotion to the gods.

Even though millions of Indian people live in poverty, India is the world's largest consumer of gold. Not just a luxury for the rich, every family acquires and gives gold on special occasions. From a bride's wedding ornaments to a baby girl's first gold earrings or the gold grain placed in the mouth of a deceased loved one, gold is the touchstone of status and security.

Even though millions of
Indian people live in poverty,
India is the world's largest
consumer of gold.
 
 
 
 

The perpetual demand for gold, which India does not produce, is a major drain on the economy. Higher incomes, thanks to economic reform, have boosted the demand, but a drop in gold production (especially in South Africa) has forced prices up and high duty on imported gold has Indians turning to smugglers to satisfy their obsession.

According to the Bombay Bullion Association, last year India lost an estimated Rs 6,000 crores (Rs 60 billion, about $1.7 billion) of foreign exchange through smuggling, but the figure could be higher. Even though the government has legalized the import of gold, smuggling went up to 134 tonnes in 1995, from 118 tonnes in the previous year. The government lost over 25,000 crores ($7.2 billion) to bring in smuggled gold.

Efforts to curb smuggling by liberalizing the import of gold have failed. Import duty is still high at Rs 220 per gram, and an importer must obtain a license, the premium on which fluctuates according to the market value of gold, among other factors.

Last year India's official gold
consumption was 477 tonnes. By
the year 2000 it could reach
1000 tonnes.
 
 
 
 
 

Customs officials find it difficult to identify smuggled gold, because so much legal gold is coming in, much of which is unmarked. Without identification numbers on gold bars, forged documents can be easily mocked up and bars transferred to cover for unofficial supplies.

The World Gold Council says the Indian market for gold is expected to double in 1996. Last year India's official gold consumption was 477 tonnes. By the year 2000 it could reach 1000 tonnes. This is bad news for India's economy unless the government makes an effort to further liberalize its import schemes to make smuggling unattractive.

Jennifer Morrow                               


About the Author -

Jennifer Morrow is a Canadian radio journalist based in New Delhi. She edits a publication on social and current affairs in South Asia, and is a freelance correspondent for the Voice of America. Also, she is a member of the Indian Economy Overview Editorial Panel.

About India's OBSESSION WITH GOLD -

India is about the order of magnitude in area as the whole of Europe, excluding the formally known USSR. However, its total population is today greater than the whole of Europe, including the former USSR. Its teeming masses are about 1,000,000,000 strong today. That is nearly four times the US population. They are composed of many different races speaking about 200 distinct languages. Nevertheless, there is one common "language" among all: GOLD. Their obsession for the yellow metal is seeped in the varied Indian cultures and has permeated the many geographical areas that make up the great and diverse nation of India. In fact gold almost has religious connotations in some areas. It is highly valued - indeed revered as a possession and status symbol.

Therefore, the anticipated
Indian gold consumption
of 1,000 tonnes will
represent 42% of total
new world supply.
 
 
 
 
 

World gold experts estimate Indian demand will reach 1,000 tonnes within the next three years. This must be put into perspective to appreciate how much India's insatiable demand for the yellow metal may have a large impact upon prices here out to the millennium. According to data from the South African Chamber of Mines total Western World Gold Mine Production in 1995 was 1,992. It is indeed a startling revelation it to compare India's projected gold consumption needs in the 2000 to the estimated Western World Mine Production for the same period.

Per South Africa Chamber of Mines data from 1984-1995, Annual Western World Gold Mine Production grew at a 3.4% compound rate. In the event Western World Mine Production growth rate remains constant (which is in doubt as the world's largest gold producer, South Africa, has suffered 10% production rate declines during the last two years), then it is estimated gold mine production will reach approximately 2,400 tonnes in the year 2000. Therefore, the anticipated Indian gold consumption of 1,000 tonnes will represent 42% of total new world supply. This begs the question: What about the gold consumption needs of THE REST OF THE WORLD?

Per South Africa Chamber of Mines data, the Annual Western World Gold demand from 1984-1995 has grown by 6.3% yearly. In the event that demand growth remains the same (which also is in doubt as numerous Far-Eastern countries have experienced ACCELERATE GOLD CONSUMPTION GROWTH RATES), it is estimated gold demand will be 3,380 tonnes by the year 2000. Consequently, this will result in a severe gold production deficit.

This represents a gold
mine production short-fall
of 980 tonnes.
 
 
 
 

At the millennium gold mine production will be about 2,400 tonnes. The Indian consumption will take down 1,000 of this amount - leaving a mere 1,400 tonnes for the rest of the world vis-à-vis remaining demand of 2,380. This represents a gold mine production short-fall of 980 tonnes.

Economics 101 in any Junior-College teaches the unassailable logic that whenever demand is growing much faster than supply, causing severe production deficits, THE PRICE OF THE COMMODITY MUST INEVITABLY RISE AS A RESULT. Unequivocally, the principles of economics demand a price rise in order to:

  • To mollify burgeoning demand
  • And to stimulate production

The obsessive Indian need for gold, complemented by accelerating gold demand of the affluent Far-eastern nouveaux riches will force the price of the yellow metal to soar to record highs in the not too distant future.

vronsky        

* The above colors are those of the great nation of India.

24 karat gold is pure elemental gold.