Commodity Online
India is the world's largest consumer of gold. Do you know how many tons of gold rest in India? Or how the gold economy helps India? Or how gold is having to compete with the stock market, investment in internet industries, and a wide range of consumer goods?

Read here about India's booming gold economy:

It is believed that at least 13,000 tons of gold rest in India – or approximately nine per cent of the world’s cumulative mine production. This should be viewed against our share in land area at 2.4 per cent, in population at 16.4 per cent and in GDP at 1.2 per cent. Mining and production of gold in India is negligible, now placed around 2 tons as against a total world production of about 2,272 tons in 1995.

During 1990-95, India’s share in global gold demand is placed at about 402 tons (16.4 per cent) a year, including imports into India. This should be viewed against its share of 0.6 per cent in world trade. On the other hand, India exported about 23 tons in 1995 accounting for a negligible part of world trade.

The world gold trading is concentrated in the U.K., Switzerland, Dubai, Hong Kong, etc. and India does not figure among them.

Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively.

Of the total gold reserves estimated to be on the books of the Central Banks (subject to some Banks not declaring them) of 28,225.4 tons, the holdings of Reserve Bank of India are only a modest 397.5 tons. Government of India has in its possession some amount of gold mainly out of confiscation of smuggled gold remaining after transferring it to the Reserve Bank of India from time to time.

RBI is neither a speaking purchaser nor a seller of gold reserves, unlike many other countries including some developing economies, especially in Asia. A part of gold was used by RBI (in parallel with gold with Government) for raising foreign currency resources during the balance of payments crisis in the early 'nineties. These overseas gold holdings are being used as part of reserve management to yield a return.

Use of gold as a financial product is virtually non-existent in India except to a limited extent of issuing ‘Gold Bonds’ by Government of India from time to time coupled with occasional tax amnesty. Commercial banks, however, accept gold as security, but no advances are permitted for purchase of gold by their customers for non-productive use.

Gold is valued in India as a savings and investment vehicle and is the second preferred investment behind bank deposits. India is the world’s largest consumer of gold in jewellery (much of which is purchased as investment).

The hoarding tendency is well ingrained in Indian society, not least because inheritance laws in the middle of the twentieth century lent a great desirability to anonymity. Indian people are renowned for saving for the future and the financial savings ratio is strong, with a ratio of financial assets-to-GDP of 93%.

Gold’s circulates within the system and roughly 30% of gold jewellery fabrication is from recycled pieces. India is typically also the largest purchaser of coins and bars for investment, although last year it had to concede first place to Japan in the wake of the heavy buying in the first quarter due to fears for the stability of the Japanese banking system.

In 1998-2001 inclusive, annual Indian demand for gold in jewellery exceeded 600 tons; in 2002, however, due to rising and volatile prices and a poor monsoon season, this dropped back to 490 tons, and coin and bar demand dropped to 67 tons. Indian jewellery offtake is sensitive to price increases and even more so to volatility, although this decline in tonnage since 1998 is also due in part to increasing competition from white and brown goods and alternative investment vehicles, but is also a reflection of the increase in price.

The Indian bride’s “Streedhan”, the wealth she takes with her when she marries and which remains hers, is still gold, however (thus giving gold an important role in the “empowerment” of women in India).

Local expenditure, in terms of the value of the gold content purchased, peaked at Rs 302 billion (Rs 311 per capita) in 1998, when total Indian demand was almost 775 tons, and since then has dropped to Rs 279 Bn in 2002 (Rs 284 per capita), a decline of almost 9%. This peak in 1998 came in the wake of the main liberalisation step, which was the freeing of imports in November 1997.

Typically, India accounts for 20% of global gold offtake in any one year. Its GDP (as measured by the World Bank) in 2001 was 1.5% of the world’s total, ranking twelfth – although if this is measured on Purchasing Power Parity, then India ranks fourth with 6.4% of the world total. While changes in total demand per capita, in terms both of tonnage and expenditure show how Indian jewellery demand in 2002 compared with the rest of the world in terms of offtake per capita and against GDP.

Offtake per capita is still very low, reflecting the widespread distribution of the rural population and the social infrastructure of the country (the rural population accounts for approximately 70% of national gold demand), but offtake in terms of GDP is high. At just over one gramme of demand per thousand dollars of GDP, India stands third in the world, behind only the UAE (just over two grammes) and Bahrain (almost 1.5g) – although these two are both enhanced by tourist purchases.

It was not always thus. As recently as 1991, Indian gold demand was a little over 230 tons, or only 8% of world offtake. The deregulation of the market during the 1990s brought about a dramatic change. Jewellery demand increased from 208 tons in 1991 to peak at 658 tons in 1998, while demand for investment bars grew from ten tons in 1991 to 116 tons in 1998, and registered 85 tons in 2002. These figures reflect average growth rates of 16% and 30% per annum respectively between 1991 and 1998. While both have eased since 1998, there is still a fascination in India for gold and there is significant scope for the development of further demand in the country.

In the cities, however, gold is having to compete with the stock market, investment in internet industries, and a wide range of consumer goods. In the rural areas 22 carat jewellery remains the basic investment.

The World Gold Council, which was involved in the deregulation of the market in the 1990s, continues to work closely with Indian gold market stakeholders to foster increased demand, partly through the development of new gold instruments that can be bought through banks, as an additional set of distribution channels, although the rural community does still tend to prefer to use jewelers.