Gold imports fell 17 per cent in the second half of 2001-02, and by 55 per cent in the first quarter of 2002-03. The trend switched in July 2002, resulting in a small increase of 4 per cent in rupee terms; August has seen imports surge by 31 per cent. The contraction that had begun in August 2001 has yielded to a cycle of expansion. Quick estimates indicate that July-September imports will rise 20 per cent, while second half imports may go up by 45 per cent.
There is something strangely stable about total gold imports in recent years: Rs 18,000 crore in 1999-00, Rs 18,800 crore in 2000-01, and Rs 19,700 crore in 2001-02. Underpinning the 45 per cent growth estimate for the second half of this year, is a full year import level of Rs 20,600 crore.
With gold constituting over 7 per cent of our merchandise imports (petroleum is 24 per cent), it is surely important to try and understand what drives this demand. The World Gold Council (WGC) distinguishes between jewellery (90-95 per cent) and retail investment (5 per cent in 2000) demand. Worldwide, in 2001 retail investment demand more than doubled over 2000 levels ? a consequence of declining stock market returns and the uncertainties following 9/11.
During January-September 2002, while investment demand fell 8 per cent, the levels are still double that of the corresponding period in 2000. The WGC estimates that India accounts for over one-fifth of global gold demand and that the proportion of retail investment demand in India is much higher at 15 per cent. The demand for gold in both uses has been steadily falling in absolute terms since 1998, with jewellery use down by 7 per cent and investment use reduced by 4 per cent.
The surge in world investment demand for the yellow metal is easy to understand. On September 26, 1999 the Central Bank Gold Agreement was signed. The sale of reserve gold by European central banks that had sent gold prices into a tailspin, became a predictable quantity over a ten-year horizon. Prices jumped from $256 per troy ounce (oz) in August 1999 to $310/oz in October, falling thereafter towards $270/oz. Prices rose after 9/11 and over the past 12 months, gold has gone from $273 to $318/oz, an increase of over 16 per cent, much of it due to the decline of the $ against the euro ? some 14 per cent in the same period. But there has been real appreciation too, the bottom end evidenced by the 2 per cent rise in the euro price of gold from 310 last November to 317/oz currently.
In India, the only international asset effectively available to resident Indians is gold. This is reflected in part by the proportion of retail investment in gold demand being three times higher than world levels till 2000. Most Indians view jewellery as a long-term asset, akin to real estate, and not as a consumable. Why did Indian gold imports stay in reverse mode between August 2001 and July 2002, when international prices were rising in both nominal dollar and euro terms and reflected in an increase of 18 per cent in domestic prices?
The other factors bearing on asset play ? declining interest rates, stock market and real estate returns ? have been something of a constant ever since the latter half of 2000. Then, stabilisation of the rupee-dollar exchange rate this year reduces the implicit rupee return on gold. Is the import surge in recent months a lagged response to a climate where $/euro 310-320/oz is beginning to be viewed as a new stable (and higher) price range? Is the election cycle cause of temporary excess demand for inward rupee movements, and therefore higher gold imports?
The mosaic of factors that impinge on gold demand in India, for investment and transactional purposes, is truly complex. There are lessons surely for forward movement on capital account liberalisation and increasing the market access of resident Indians to international financial assets, such that the resultant asset allocation process generates positive externalities in deepening and widening the capital market, rather than disappearing into the stillness of a golden ocean.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)