International Finance

Assignment
Submitted by:-
Syeda Maham Waseem (170156)

Submitted to:-
Sir Shoaib
 The Economics of Gold: India’s
Challenge in 2013
Q1) How is the Indian gold market different from the rest of the World?

There are many factors that drive the gold market, it includes supply and demand, then
exchange rate, inflation or we can say gold prices, and many more factors. By combining
Exhibit 1(a, b) and Exhibit 4 I’ve made a table so that my points of discussion become more
clear.

World India
Years Gold Prices World Gold Demand Gold Prices India Gold
(US $ per 10 grams) (Jewellery) (₹ per 10 grams) Demand
(Jewellery)
2004 133.09 2619 6145.38 572
2005 153.22 2721 6900.56 634
2006 202.44 2302 9240.32 551
2007 246.21 2425 9995.62 595
2008 278.81 2306 12,889.74 623
2009 328.91 1817 15,756.09 503
2010 415.88 2034 19,227.08 685
2011 528.84 2029 25,722.42 667
2012 531.61 1998 30,163.93 618
2013 426.54 2361 29,190.39 607

Now looking at the table above we can see that global gold jewellery demand varies with
the gold prices. In 2008 when gold prices shifted from 246 to 278, the jewellery demand
also decreased from 2425 to 2306. But in India we can’t see that pattern, from 2008 the
gold prices rose from 9995 to 12,889 and, the jewellery demand in India rose from 595 to
623. And while raises in prices in too much the demand remains almost constant or there’s
very nominal or little change seen in the demand in India.

So, we can say that gold demand in India is not price elastic, but it may depend upon other
factors. While in the global market, the demand is price elastic. It may be because of mind
set of Indian people regarding gold, their religious and social beliefs as discussed in the case.

Secondly in India, Gold demand is mostly for the jewellery and investment purposes, that is
62% and 37% respectively and industrial usage is only for 1%. But in the rest of the world,
industrial usage is 9% of global gold demand, and jewellery is 52% and industrial is 39%. So it
also means that in India, major focus is on saving purposes.
Now moving towards the other point, as everybody knows India has a limitless appetite for
gold and the Indian public holds about 10% of all the gold in existence. Only about 1% of the
world's annual gold production is mined in India yet it consumes about a third of the world's
production annually. This disparity between supply and demand is met by recycling and
import. When legal import channels exist there is a premium in the form of import duties
plus freight and insurance charges plus the importer's profit margin. When no legal import
channels existed and gold smuggling was rampant, this premium would stretch to whatever
the buyers were willing to pay on top of the international gold price. So, India does not price
gold, the local market does. Price is discovered by what the buyers and the sellers can
mutually agree as to a reasonable price. It is also observed that the price of gold can be
different in various cities and regions of India according to local supply demand factors. And
as gold cannot be freely imported into India and gold import (supply) is subject to the policy
objectives of the government in power, while demand is seasonal, (marriage and festival
seasons), it is a separate market from the rest of the world.

Q2) What drives the demand for gold jewellery in India?

With an annual demand equivalent to about 25 percent of the total physical demand
globally in 2013, India is one of the largest consumers of gold. There are many factors that
constitute this demand and mainly dividing it into three activities, they are:

 Religious Reasons
 Social Reasons
 Economic Reasons

 Hindus constitute almost 80.5% of the Indian population and gold is part of Indian
religion and culture.
 Traditionally, there is a flood in jewellery demand during the festive and wedding
seasons, leading to a rally in gold prices.
 A significant factor affecting gold consumer demand (jewellery, and bar and coin
combined) over the long-term is income i.e. gold demand is seen to rise with income
levels. For a 1 percent increase in income per capita gold demand rises by 1 percent
 Gold has a central role in the country’s culture, considered a store of value, a symbol
of wealth and status and a fundamental part of many rituals.
 Among the country’s rural population, a deep affinity for gold goes hand in hand
with practical considerations of the portability and security of jewellery as an
investment. 
 The ancient law-giver Manu decreed that gold ornaments should be worn for
important ceremonies and occasions. Aside from Diwali, one of the most important
 dates in the Indian calendar, regional festivals across the country are celebrated with
gold: in the south, Akshaya Tritiya, Pongal, Onam and Ugadi; in the east Durga Puja;
in the west Gudi Pavda; in the north, Baisakhi and Karva Chauth etc.
 Gold is central to more personal life events too. Gifting gold is a deeply rooted part of
marriage rituals in Indian society—weddings generate approximately 50 percent of
annual gold demand.
 It is also a good mean of saving for them. In Kingdoms and dynasties it was used as
common medium of exchange (so people perceived it to be only mean to preserve
wealth).
 Gold is considered as safe investment option in India as it is believed to excellent
inflationary hedge and the gold returns are seen to be increasing with every passing
year (Exhibit 3)

Q3) Is gold a good investment option?

My answer to this question is yes, gold is really a good investment option in India. Firstly, in
(Exhibit 2 ) we can see the returns on securities and on other commercial bank deposit rates
and gold returns. In the exhibit we can clearly see that gold returns in India are higher than
other options. After 2008 the returns on gold became even higher. So people like to invest
in gold because of its always positive returns. And return on other options e.g. stocks and
bond is also applicable to tax but not the gold returns.

Gold is seen as a safe investment option and is believed to be excellent inflationary hedge.
As rise in gold prices in India, beat inflation by a large margin. Return on gold in India is
about 10.6% for a 30 year horizon (Exhibit 3) , as compared to international market(only
5.61%) .

As inflation is increasing in India and gold prices too, so they are considered to be
investment for future benefits, like in the future the gold prices would become even more
high. But this is not the case globally, gold is a really good option in India but not globally,
the gold prices in dollar terms has not increased exponentially. (Rupee/$ exchange rate)
(Exhibit 5).

The main advantages of the gold and not affected price in India are as follows:-

 They always given positive return to the buyers

As gold returns are thought to be a function of gold prices so higher would be the prices, the
more return you could gain. On an average of last 30- year horizon, international market
return on gold was 5.61% and Indian market return was almost 10.6%.

Prices of gold varied across different regions depending on each region’s import costs and
applicable taxes. In India, gold demand has been very high, due to which prices also become
high. In India gold prices increased exponentially in the last 30 years but this is not the case
for rest of the world, price of gold had been higher than inflation in India.

But in other countries, gold demand and prices are somehow lesser as compared to India,
because of less demand of gold there. There are less gold prices and not sudden hike in the
prices of gold seen there so the return is also low there. In India increasing gold prices were
major reason that it was lucrative or profitable option in India but is this not the case for
rest of the world.

Q5) Is the growing demand for gold a cause of concern for India? Why or why not?
What is your opinion of the government increasing the import duty to curb
demand?

I think so that growing demand for gold is a cause of concern for India. The Indian public
holds about 10% of all the gold in existence, almost 23000 to 24000 tonnes of gold are just
held by Indian households. Only 1% of the world's annual gold production is mined in India
yet it consumes about a third of the world's production annually. India is not a gold
producing country and mostly is imported to fulfil the demand. In 2003, there was a record
high current account deficit that was attributed to the rising gold imports. So more demand
was being a problem for the economy as they have to import the rest and this caused
deficits.

Secondly Indian currency keeps dollars and gold as reserves. If people keep importing gold
in exchange for dollars, then Indian rupee will further depreciate.

 Government is increasing import duty that is a good step. Government raised gold
import duty from 4% to 15% in 2013 (within 7 months). So in Exhibit 1 we can see
that in 2013 the imports decreased from 1071 to 962 and demand for jewellery also
decreased because of this step taken by Government.
 But Government should take other steps too like spreading awareness in people
about other investment options .Government can ban jewellery imports and only
allow raw gold imports, so that they can make jewellery themselves and fulfil their
demand without paying extra money (as raw gold is cheap than jewellery) and could
also export it.