“For the jewelry sector, the current situation is worse than during Covid-19.” All because of the war in Iran. More than 90% of the gold sold in India is imported. Reduction in Indian demand could have an impact on the world price of gold.
The growing economic impact of the war in Iran has led India to ask its citizens to stop buying gold for a year.
“For the good of the country, we will have to decide that, for a year, we will not buy gold jewelry, even if there are family events”, declared, on May 10, Indian Prime Minister, Narendra Modi.
“Patriotism is not just about the willingness to sacrifice one’s life at the border,” Modi stressed. “In these times, it is a matter of living responsibly and fulfilling our duties to the nation on a daily basis.”
Three days later, the India increased gold import duties from 6% to 15%. It is a harsh measure, as India is the second largest gold market in the worldboth in jewelry and for investment.
In the last fiscal year, ending on March 31, the country’s gold imports totaled US$72 billion. Gold also plays an important cultural role in India. The metal is often given as a wedding gift and passed down as an heirloom.
Modi stated that the purchase of gold was consuming large volumes of foreign exchange, at a time when India is facing rising oil prices. THE country imports more than 85% of its oil that consumes.
Oil prices soared by 70% at their peaks, after the start of the United States and Israel’s war against Iran and the end of the Strait of Hormuza fundamental commercial route through which around 20% of the world’s supply of oil and liquefied natural gas passes.
Rising energy prices have pressured governments around the world to adopt savings measures. Many countries have focused primarily on energy savings, but India appears to be the only nation asking its citizens to reduce gold spending.
The metal has become a major economic concern in the country as gold and oil imports are mainly paid for in US dollars.
Greater demand for dollars could weaken the Indian rupeewhich has already depreciated around 5% against the dollar this year. And this devaluation could generate inflationary pressures.
“For the jewelry sector, the current situation is worse than during Covid-19,” says New Delhi-based jeweler Sanjeev Agarwal. Another jeweler in the Indian capital, Abhishek Agarwal, says companies fear they will find it difficult to survive if people stop buying gold.
Non-essential imports
More than 90% of gold sold in India is importedaccording to Sundaravalli Narayanaswami, professor and director of the Gold Policy Center at the Indian Institute of Management in Ahmedabad, in the west of the country.
“Every year, 600 to 700 tons of gold are imported and exports are very small”, explains the professor. “That’s why gold accumulated in families.”
It is often said that Indian women own about 11% of the world’s gold. But this number is difficult to verify and estimates also vary. In India, as in the rest of the world, many people see gold as a safe investment in times of uncertainty. Therefore, demand can remain high even during economic downturns.
Gold prices have risen considerably in recent years, surpassing $5,000 per ounce for the first time in January.
O metal represents about 9% of India’s total imports. But, unlike oil, it is not considered essential, as it is mainly purchased in the form of jewelry or as an investment, and not for industrial production.
In the past, India has tried to discourage excess gold imports in periods of economic difficulty by increasing import tariffs and promoting investment alternatives that do not involve physical possession of the metal.
What will be the impact?
In addition to appealing to the population to refrain from buying gold, Modi also asked people to use public transport, share cars, opt for teleworking and limit non-essential trips abroadto reduce fuel consumption. The Indian Prime Minister urged families to reduce their use of cooking oil and asked farmers to reduce their consumption of fertilizers.
Other governments in various parts of the world have adopted similar measures to respond to rising fuel prices.
O Sri Lankafor example, created a fuel quota system for vehicles and asked public institutions to reduce energy consumption. Already the Thailand appealed to the population to reduce the use of air conditioning. THE Egypt had already ordered the early closure of stores and restaurants, while Mozambique advised its citizens to opt for teleworking.
Modi’s appeal for the population to stop buying gold is, nevertheless, “quite unusual”according to Hamad Hussain, from the research firm Capital Economics. “But in the case of India, this is explained by the fact that the country imports large volumes of gold, which represents an important part of its imports. So, in a way, it makes sense.”
A whole year is “too much”
Economists are divided on the impact that a possible reduction in Indian demand could have on the world price of gold.
India is the most populous country in the world and a major consumer of the metal. Therefore, a drop in demand “would put pressure on world gold prices… unbalancing the market due to excess supply”, explains Hussain.
But Sebastien Tillett, from consultancy Oxford Economics, considers that the impact would be “marginal”, as prices are currently more influenced by investor demand and geopolitical uncertainty. He also doubts that Modi’s appeal to Indians will significantly affect gold purchases in the country.
“Public appeals may have some effect, but most likely they will postpone or change purchases, without eliminating them”, he states.
Tillett points out that gold remains “deeply rooted in Indian culture and household economics.”
“The short-term impact may also be mitigated by seasonality. Demand for gold tends to be lower outside of the main shopping seasons for weddings and festivals”, he adds. “So it’s likely that some of the slowdown would have occurred anyway.”
In 2013, government authorities and industry professionals associated the increase in gold import tariffs, which occurred at the time, with the growth of smuggling and illegal trade.
Analysts describe Modi’s call as the “most drastic” set of measures announced to date in response to rising energy prices.
The leader of the opposition in India, Rahul Gandhi, stated that the government would be “transferring responsibility to the people”. Representatives of the country’s jewelry sector called for a direct meeting with the government to find a solution.
“If it was just two months, maybe we could manage the situation, but a whole year is too much,” says another jeweler, Shweta Gupta. “How do you think we will pay our employees?”
