Although India continues to be one of the world's largest gold bar and coin markets, the rising equity markets, financial literacy, and government regulations have impacted their demand tremendously in recent times, the World Gold Council (WGC) observes in its latest report.
Highlighting the latest trends in India in the chapter titled "Gold Investment Market and Financialisation", WGC notes that higher financial literacy, primarily due to initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), has moved people away from gold in favour of other financial products. However, gold demand from lower and mid-income groups, which traditionally considered gold a better form of investment than bank deposit accounts, remains.
Financial Literacy Moved People Away From Gold
The surge in fintech players providing easy access to financial services due to the rapid internet penetration in recent years, combined with a strong performance of equities, has encouraged many investors to invest in the stock market, it says, noting that over the past decade, India's benchmark equity index, the Nifty 50, returned 210 per cent compared to 180 per cent for gold.
It infers this shift to the equity markets to the rapidly growing number of mutual fund accounts, which rose from 40 million in 2015 to 143 million in 2023. It further notes that Demat accounts surged from 24 million in 2015 to 108 million in 2022. Despite this move towards equities, it observes that household savings in stocks and mutual funds make up only 10 per cent of the total household gross savings, suggesting scope for further penetration by equities.
Regulations Play A Part In Declining Demand
Cash purchases, which account for a “meaningful share” of gold transactions, have been affected by government actions, from demonetisation to restrictions on cash purchases and a mandate to provide PAN details, says the report. Regulations by successive governments to address the challenge of unaccounted money and reduce the country's dependency on cash transactions “have contributed to the decline in bar and coin demand in recent years,” it notes.
Savings Habits Change With Changing Demographics
Savings habits of India’s relatively young population, or roughly 65 per cent below the age of 40, are far removed from those of their parents as they have a “greater propensity” to spend on equities and new financial products like digital gold and cryptocurrencies. So not surprising that India's savings rate has fallen from 33 per cent to 30 per cent over the last decade. However, the report says that rising incomes should benefit gold purchases, adding that gold will have to compete with other high-value consumer products, like electronics and mobile phones.
Gold-related Products Gains Prominence
The domestic gold price more than tripled, from Rs.9,390 per 10 gm in March 2007 to Rs 30,169 per 10gm in January 2013, and inflows into gold ETFs also surged. But after the sovereign gold bond (SGB) launch in October 2015, gold ETFs faced challenges as the Indian gold ETF market saw continuous outflows from 2013 to 2018. However, the demand picked up in 2020 due to the Covid fuelled safe-haven demand as the volatility in equity markets and economic uncertainty increased. This positive momentum carried into 2021, the report adds.
Other Highlights
The household survey by the India Gold Policy Centre (IGPC), cited in the report, reveals that gold demand in low-income households is not necessarily driven by income levels but by the lack of access to financial and investment products, which had a more significant bearing on demand. However, households in lower and mid-income groups and rural belts still consider gold a better investment mode than bank deposits.
Another study by DVARA Research, an India-based policy research institute, found that households with low net worth were likelier to take an informal loan than households with high net worth. "As a large amount of lending against gold happens in the informal sector, it further strengthens the fact that gold as an investment is preferred by low-income or rural households in India," the report states.
Commenting on the findings, Somasundaram P.R., Regional CEO, India, WGC, said: "Even as traditional demand drivers seem to face headwinds due to demographic shifts, digital thrust to financial inclusion, changing role of women and stronger tax compliance, gold is resilient due to its multiple traits addressing many social and economic needs. The manner in which India has woven gold into its milieu speaks a lot about practical household wisdom, which can be equally tapped for financialising vast stocks of gold in the emerging economic context"
