Younger population, digital products, urbanisation to drive India's gold demand: World Gold Council

Between 2000 and 2010, demand increased by over 40 percent, going from around 700 tonnes to 1,000 tonnes per annum. This growth persisted even as the gold price surged by 137 percent, as per capita income rose by 77 percent, effectively offsetting the impact of rising prices.

Also Read | Bain Capital-backed Emcure Pharmaceuticals refiles IPO papers with reduced issue size

Gold jewellery in rural areas of India often serves a dual purpose as both an investment and an adornment, while the urban population tends to favor gold bars and coins as their preferred forms of investment. As urbanisation continues to increase and India undergoes a shift away from the agricultural sector, higher incomes are expected, leading to a subsequent rise in the demand for gold, according to the WGC.

One percent increase in monsoon rainfall above the long-run average boosts gold demand by 2 percent, since a good monsoon can increase crop yields, sweep money into the rural economy and boost gold demand.

Physical gold has been the primary form of investment for millions of Indians across the country, especially in rural areas where access to banking, equities or other forms of investments aren’t as easily accessible. However, since gold as an asset class was losing favour, the gold market has witnessed the influence of new products, such as sovereign gold bonds, ETFs and other digital gold offerings.

Risks for gold

Inflation could drive greater interest in gold in the future. India has grappled with persistent inflation, often surpassing 10 percent over the last four decades, posing significant challenges to the economy, said the WGC. For each one percentage point increase in inflation, gold demand increases by 2.6 percent.

However, over the long-term, gold outperforms CPI inflation. In 40 years, gold has delivered an average annual return of 10 percent, while the CPI expanded by an average of 7.3 percent over the same period.

Gold’s performance has also been particularly strong when inflation was high, increasing by 11 percent on average, when inflation rose above 7 percent. However, between 2014 and 2020, average retail inflation remained below 5 percent, which put pressure on gold.

The WGC mentioned that while the government's efforts to enhance financial inclusion have yielded positive results for the country's overall prosperity and income equality, these initiatives have also presented challenges for the gold market. Gold was the preferred form of investments, but with more than 80 percent of the country having bank accounts, “gold faces unprecedented competition as an investment asset”.

“Consumer spending on other goods has increased, growing financial inclusion has encouraged more people to put their savings in the bank and greater financial literacy has boosted interest in other assets, such as equities,” said the WGC.

Also Read | ITC’s largest shareholding open to paring stake; notes challenges on complex FDI rules

Smartphones have allowed users access to financial services products, increasing inclusion. There has also been rising interest in equities and mutual funds, with the number of demat accounts rising exponentially over the past decade.

India depends heavily on gold imports, with gold making up around 7 percent - however, these imports are taxed at 10.75 percent.  An increase in the rate of import duties since 2012 has depressed demand for gold by 1.2 percent per year.

This has lead to gold smuggling. In H2CY19, official gold imports fell and the CAD narrowed, but unofficial imports surged by 42 percent.

"A reduction in tax rates could therefore confer benefits on two fronts. Lower duties would almost certainly boost overall demand for gold. And lower tax rates could create more opportunities for the compliant and organised sections of the gold market by squeezing out the unofficial or ‘grey’ market," added the gold research firm.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.