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India’s Plans to Reform the Gold Market and What They Could Mean for You

Thursday, April 19, 2018

We’ve mentioned the Indian gold market a few times in this blog – as the world’s largest single consumer of gold, there’s plenty here to talk about. We’ve explained why the commodity is so important to the Indian festivals of Diwali and Akshaya Tritiya, and looked into a recent phenomenon of increasing sales in the rural Indian gold market.

Whenever we look at the gold market in India, we’re presented with a recurring theme – that gold sales have been less than expected over the past few years, and that things are steadily starting to change.

We reckon that the pace of change is about to increase. Recently, the Indian government signalled wide ranging proposals intended to improve the incomes of rural India and make it easier for those people to buy gold. In response, the World Gold Council (WGC) released a wide ranging report that looks into the potential effects of these reforms.

We’ve had a trawl through the information, so you don’t have to, and brought together all the essential points to keep track of the effect these proposals could have on the gold price.

Gold in India – The lowdown

Despite India’s strong cultural attachment to gold, the state itself hasn’t always had the smoothest relationship with the commodity. Things may be improving now, but once upon a time, possessing gold was actually illegal. That’s right, almost immediately after achieving independence in the 1940s, the Indian government banned gold ownership and manufacturing.

In the latter decades of the 20th century, these policies were gradually whittled down. An outright ban on gold ownership eventually became a cap, and eventually manufacturing of gold 14 karats and below became permitted. Between the 60s and 90s there seemed to be at least tacit movement towards a more liberal gold market.

Unfortunately, governments over the last decade have taken a stark U-turn. In 2012, gold import duties were increased from 2 per cent to 10 per cent. The following year, the government mandated that there had to be at least an 80:20 ratio of gold bullion to gold jewellery imported, creating a significantly distorted supply chain. It’s safe to say that these policies have had a significant impact on the price of gold in India. 

India’s latest budget

Luckily, the Indian government have now signalled that things are about to change once again – this time we hope for the better. On the 1st February, the government delivered its Union Budget, which showed a significant change in tone. Though no concrete policies were announced, the Finance Minister Arun Jaitley signalled that the government was exploring new proposals for the way gold is treated in the country.

Here’s a look at the three main proposals that were unveiled as part of this latest budget:

Even to those of you familiar with the gold market, there’s a good chance that this all seems like technocratic jargon. But there are some quite important nuances in this seemingly political verbosity – so buckle up for a moment while we get technical.

The most eye-catching policy here is the proposal to develop gold as its own asset class. What that essentially means is that both the government and the country’s financial institutions will begin to recognise gold as an asset in its own right.

Gold can therefore start to be considered a form of wealth in the same way as currency, stocks, bonds or real estate, rather than a shiny lump of rock that happens to be valuable. The distinction is important, because it means the government can start to build joined-up policy making and gold can start being traded to its full potential across the country.

Even in its days of more liberal attitudes to gold – India has always suffered from slightly disjointed gold market policies. The promise to ‘enfranchise’ gold as a legal asset and create an integrated system of policies to encourage the trade of it is perhaps one of the brightest signals for reform in the Indian gold market over the past decade.

So why should you care?

Good question. India likes gold. In fact, according to the WGC report, about a fifth of the world’s gold exchanges take place in India – and that’s even with the country’s current restrictive gold policies. So if more people start buying and selling gold in India, we could well see a big impact on supply and demand around the rest of the world.

In fact, this effect is so profound that the WGC estimates that a 1 per cent increase in income across India leads to, on average, a like for like 1 per cent increase in demand for gold worldwide. That’s a pretty impressive rate of influence over a global market for any one country to have.  

Rising living standards

As well as showing promising signs of liberalising the gold market, the Indian government have also pledged to double farmers’ income by 2022. What does this have to do with gold? Listen up.

The rural economy is a pretty important part of India’s overall gold market – it accounts for about two thirds of it in fact, according to the WGC report. Some back-of-the-envelope calculations would suggest therefore that about 13 per cent of the world’s gold is purchased in rural India.

We all know not to take politician’s policies too seriously – but if the Indian government even come close to their pledge of doubling farmers’ wages and revolutionising the overall rural economy – there’s a good chance we’re going to see rising demand for gold in India over the coming years. Couple that with a liberalised market, and that one fifth of global gold trades could well become a lot bigger.

With rising demand comes inflated prices and thus, the value of your gold bars or gold coins could be set to rise. Check out our range of gold bullion today if you want to get ahead of the curve.