India’s endless fascination for the yellow metal

India’s lure for gold is forever and defies all its cultural, linguistic and religious diversities. Indians consider it as a storehouse of value, a symbol of wealth and it plays a major role in many rituals. India is the second-biggest gold consumer, next only to China.

The recently concluded two-day festival of Dhanteras saw robust sales of gold, jewellery and coins this year on strong pent-up demand. The jewellery business saw a sale worth Rs 25,000 crore during the two days. The previous two years of Covid-19 pandemic restrictions and its economic fallout had cast its shadow over the gold market during the period.

However, when compared with other commodities, gold fared much better even during the pandemic as it is always considered a safe investment, especially in times of uncertainty. In the financial year 2021-22, India spent $46.14 billion on gold imports, an increase of more than 30% over the previous year. The jewellery retail sector is estimated to have grown at 26% in FY22, driven by the strong demand after the devastating impact of the Covid-19 second wave waned.

Gold is considered auspicious, particularly in Hindu and Jain cultures, and Dhanteras is not the only festival when Indians buy yellow metal. Festivals like Akshaya Tritiya, Pongal, Durga Puja, Baisakhi and Karva Chauth to name a few also lead to heavy footfalls in jewellery shops in various parts of the country. Advertising hardsell by jewellery retailers has also led to an increase in the popularity of buying gold during these festivals.

In Indian households, weddings account for the highest amount of gold purchases. It includes jewellery for the bride and groom and gifting and buying gold by the extended family. With the opening of the economy in the post-Covid period, analysts expect gold sales to skyrocket further. A recent report by ICRA projects the demand for gold jewellery in India is to grow at around 11% during the financial year 2022-23, almost 40% higher than the pre-Covid-19 levels seen in FY20.

This insatiable appetite for gold has been a headache for finance ministry mandarins down the ages. As the country has no major gold mines, it primarily depends on imports. This weighs heavily on the country’s current account deficit (CAD), which occurs when the value of imports exceeds the value of exports. As per the Reserve Bank of India data, India’s CAD has widened to 2.8% of gross domestic product (GDP) in the June quarter, up from 1.5% in the preceding March quarter. The two main drivers of the country’s import bill are gold and fuel.

However, while fuel is an essential commodity, gold once bought rarely changes hands and remains a stagnant asset to be used only during emergencies. As per a 2019 World Gold Council study, Indian households had stocked up to 25,000 tonnes of gold, making it the largest holder of the yellow metal in the world. Though there are schemes such as gold exchange-traded funds, sovereign gold bonds and digital gold, the preference for physical gold has not waned among Indians.