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The Indian Gold Habit – Reason, Problem & Solution

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The Golden Habit in Indians

The theme of the article and the only one Golden Rule in the market is: Those who have “THE GOLD” rules.

If we talk about the Indian economy we see that India is the largest importer and consumer of Gold. India imports 1/3rd of Worlds Gold output which only adds to its deficit. There is an unquenched thirst of gold in India which is impregnable. It is estimated that over 18,000 Tonnes of gold valued at $950bn is held in Indian Household which if used could wipe out India`s current account deficit within the blink of eyes.

5 Facts about Indian Gold Import and its Demand

  1. Indian consumer demand for gold is 37.6 % more than that of China.
  2. Gold’s share in total import bill of the country has gone up to nearly 10% in the previous year
  3. India’s forex reserves are only 8.81% of China’s forex reserves, despite being the fact that the gold demand in India is more by 37.6%
  4. India only keeps 10% of its reserves in Gold compared to US, which has over 75% in Gold. Indian gold is not with the government, but is lying in Indian Household
  5. 85% of the total gold imports in India, are used to make jewellery and the rest 15% is used in industry and investment.

Why Indians are mad about Gold

It is a known fact that the Indians are mad about Gold. Following are some of the reasons in support of the fact:

  1. Emotional Quotient: Gold has unconditional emotional value attached. An Indian wants his wife and daughter to be jewelled. Apart from this, the rising aspirations of men for gold is also not questionable. 80% of the gold demand in India comes from the Indian wedding.
  2. Gold as Investment: It is symbol of wealth, prosperity and fortune in India. In India, savings is maximum in the world which is at 30%. Out of these, 10% are in Gold being the foundation of saving.
  3. Gold as hedging instrument: The only thing certain about market is its uncertainty. In order to minimize the risk exposure, Gold is considered to be the best possible hedging tool.
  4. Liquidity of gold: It is one of the most liquid financial instrument that can be sold across any counter almost immediately which is not possible in case of any other asset or commodity.
  5. Gold as No-Frills investment: Unlike fixed deposits, equities, mutual funds; gold is no frills investment. 65% of the Indian population is in the rural areas, where availability of gold is much easier than banks and other financial intermediaries.

Read on GWI Gold vs. Equity Market in the last 3 years.

Problem with Indian buying too much gold

We must have come across the proverb which says, doing anything in excess is always a problem. If we talk in context of Gold demand in India, we see that currently India produces only 0.5% of its gold demand from its own mine. As a result of which the country is heavily dependent on imports making gold the second most imported quantity after crude.

  • Gold as Non-Productive Asset­ – Buying gold is good for people and not for the economy, as it sits idle in household on contrary to other securities like FD, Equities where investor’s money rotates in the market and multiplies.
  • Gold import burdens the already bleeding Current Account Deficit – Due to high value of gold imports, the current account deficit gets accentuated. Had there been no gold import, then we would have had current account surpluses for the years 2004-05 right until 2007-08.

A Smarter Solution to Buying Gold

It is needless to say but the fact is that India’s hunger for gold cannot be curbed. Under such circumstances the way money is invested in gold could be changed:

  • Gold ETFIt is the virtual form of storing gold and is held in Demat form as like other equity. It can be traded in the market and has no entry and exit load. There is an advantage of investing in gold, as no premiums and making charge is accounted. Also there is no worry of theft. There are tax benefits like no Sales Tax, VAT, STT payment etc. ETF also has features such as liquidity, purity, safety, tax efficiency etc.
  • Gold Fund of Funds – This fund invests in underlying Gold ETFs of different companies. In this case demat account is not required, however these cannot be traded on exchange and can be redeemed only by the fund house.

Way Forward

Last year our Gold import bill was enough to feed the country’s entire population. It is very difficult to regulate and monitor the gold market as 95% of the market is unorganized to small and medium retailers. With imparting financial prudence and high availability of other financial instruments apart from gold in the rural markets, we can curb the problem. Too much restrain on import may lead to gold smuggling. Thus, the demand of gold as an investment tool should be converted to electronic form from physical form.


Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

One Response so far | Have Your Say!

  1. rodney allsworth

    perhaps the Indian govt should consider its own gold market, buying from the mine gate at somewhat lessor market value and then selling on to the populace at a slightly higher price or releasing the gold held only at times when the market price better exceeds the govt costs of acquiring it art the mine gate, govt gets some control of gold and at the same time earns a profit for the state coffers, govt holding bullion as compared to market electronic paper gold, the people want physical gold, sharetraders only want gold holdings on paper.
    win win situation.

    rod qld aust