India gold market fact of the day!

From India Together (and Writers Block),

There are no official figures for how much Indians invest in physical gold (in the form of gold bars and jewelry). But according to estimates of the World Gold Council, the investment demand in India has grown from about 16 per cent of total imports in 2003-04 to over 35 per cent in 2012-13. The federation representing Indian jewelers (AIGJTF) estimates that 30-35 per cent of gold imports are used for meeting investment demand in the form of gold bars and coins. Of the approximately 1000 tonnes of gold being imported annually in recent years, an estimated 350 tonnes is for investment purposes with most of the rest going into jewelry.

Much of the discussion on gold imports have revolved around its impact on India's current account deficit. Who are the investors in these gold bars? What is the source of their wealth? My conjecture is that gold has become an excellent (safe and remunerative) channel to launder black money, whose volume has increased rapidly in recent years. Is it just a coincidence that in recent years we have seen a spurt of investments in jewelry retailing, including branded ones, even in second and third tier cities across India? It will be interesting to examine their balance sheets to see whether any of them are making formal profits. My guess is not!

Update 1 (31/10/2013)

Jahangir Aziz argues that restrictions on gold imports as a means to lower CAD may be a misdiagnosis of the problem, in so far as households were only fleeing to gold in the absence of good alternatives,

Gold imports rose from an average of $15 billion (1.5 per cent of the GDP) through 2005-07 to $55 billion (3 per cent of the GDP) last year, peaking at $67 billion (3.6 per cent of the GDP) in 2011-12. Some of the $40 billion-increase in gold imports is clearly due to the growth in gems and jewellery exports, but not very much. India's national income data provides a stark reminder of how much gold was used for pure investment purposes. Household investment in gold rose from an average of 1 per cent of the GDP over 2005-07 to nearly 2.5 per cent of the GDP. Using this and the pace of growth of jewellery exports, it is not unreasonable to surmise that roughly $30 billion of the rise in gold imports, that is, about 1.5 per cent of the GDP, was for investment.

The broking firm CLSA estimates that India has 20000 tonnes of gold worth $1.1 trillion. FT has more interesting points,

Indian demand jumped from 471 tonnes in 2001 to 1,017 tonnes in the year to March, worth $54bn... donations have transformed India’s temples into vast gold stores, with the country’s three largest owning a stock of 3,500 tonnes, according to a recent report from Credit Suisse... Were Indian gold demand to fall back below 1 per cent of gross domestic product, its average in the decade before the financial crisis, an extra $200bn of investment flows would be generated for the broader economy, according to research from Goldman Sachs. 

 

Update 2 (1/11/2013)

Three articles in FT here, here, and here. Also this study by RBI on gold imports and loans by NBFCs.


Update 3 (10/11/2013)

Arvind Subramanian, Devesh Kapur et al have an interesting article that raises the possibility of capital flight into Swiss banks contributing substantially to the higher gold imports. They point to the wide discrepancy between Indian gold imports from Switzerland and Swiss accounts of their gold exports and argue that it could be the case of over-invoicing gold imports from Switzerland, with the excess money finding its way into Swiss banks. Graphs here.

Update 4(1/12/2013)
From the RBI report (via Zero Hedge), this graphic of the eightfold rise in formal sector gold loans in the 2008-12 period.