Monsoon rains on Indian drive to curb gold imports

PUBLISHED : Wednesday, 04 September, 2013, 12:16pm
UPDATED : Wednesday, 04 September, 2013, 12:16pm

A heavy monsoon this year will bring a bounty to India’s rural population and a much needed boost to a struggling economy, but more cash in the hands of farmers brings an unwelcome consequence for India’s government - more demand for gold.

Gold is one of the biggest items in a record current account deficit that has helped push the rupee to an all-time low, and as New Delhi scrambles to stop the decline it has taken measures to curb gold imports and consumption.

Ironically, swelling agricultural incomes will likely make the government’s task on gold tougher, even as they help growth. About 60 per cent of Indian gold demand comes from rural areas, where buyers use it to store wealth as they lack regular access to banking networks.

“Last year I bought 20 grams. This year, I am planning to buy 30 grams,” said Nilesh Jagtap, a 36-year-old farmer in the western state of Maharashtra looking forward to a bumper sugar cane crop.

“Gold helps in many ways. Whenever I need money, I pledge (gold) with the bank. I can even sell it during a medical emergency,” said Jagtap, who lives in the western state of Maharashtra.

In 2010, the last year that rains were heavily above average, demand soared 37 per cent in the fourth quarter after harvests. At current prices a similar rise would be worth US$4.7 billion, according to Reuters calculations.

Increased demand from the world’s biggest gold buyer will buoy global prices for the metal, which climbed about 5 per cent in August but are down 17 per cent so far this year.

Imports ground to a halt in late July due to uncertainty over new regulations aimed at reducing the flow, but were likely to pick up again once authorities have clarified how the rules will work. A prolonged stoppage could cause smuggling to rocket as India is dependent on imports for most of its gold.

Gold’s lustre has been further burnished by the country’s current economic woes, with Indians hoping to hedge against the falling rupee and consumer price inflation of nearly 10 per cent.

Domestic gold prices hit a record high of 35,074 rupees (US$531) per 10 grams on August 28, equivalent to about US$1,633 per ounce, largely as the rupee slid against the dollar.

But international dollar prices for bullion are currently about 27 per cent below an all-time peak of US$1,920.30, leaving plenty of room for investors to bet on realising gains longer-term.

India still relies on the monsoon in over half its farmland, with generous rains this year prompting farmers to plant nearly 7 per cent more crops than last year and promising bumper yields when they are harvested. An official at the finance ministry confirmed farm output this year could climb 6-7 per cent from the year before.

“This year, the monsoon was good and farmer incomes are set to rise. I am expecting higher sales during upcoming festivals than last year,” said Mangesh Devi, a jeweller in Maharashtra whose customers are mainly sugar cane and vegetable growers.

The wedding season, when parents shower gold on their daughters as dowries, will coincide with the harvest, along with a host of festivals where buying gold is considered auspicious.

And the finance ministry concedes gold demand and imports will rise in the lead-up to the wedding season, which peaks in early November this year. Traditional jewellery for brides includes necklaces made of multiple strands of gold and gems that can cost upwards of 100,000 rupees.

“There are cultural factors, you can’t do much about them,” a second ministry official told Reuters.

India’s passion for gold pushed imports to an all-time high of 162 tonnes in May and duty is now at a record 10 per cent as the government tries to stop the damaging outflow of dollars for bullion.

Gold is India’s most expensive non-essential import, accounting for 13.3 per cent of the total bill and helping to push the current account deficit to US$88 billion, or a record 4.8 per cent of GDP, last year/13.

The central bank has also moved to curb supplies by insisting 20 per cent of all imports be made into jewellery for export. Customs authorities have yet to issue clarifications on how the rule will work and as a result, imports have totally dried up since the central bank announced the rule on July 22.

In theory, it should mean monthly imports are contained at around 30 tonnes - under half last year’s monthly volumes based on annual exports.

But the World Gold Council suggests India’s gold demand - not too different from imports - could be over 70 tonnes a month in the second half, hitting a record 1,000 tonnes for the full year to match China.

Some of that demand will be covered by recycling if imports are tight, though some is already being met by smuggling, experts said.

“There is nothing available through official channels, (so) supply is happening through unofficial channels,” said Mehul Choksi, chairman and managing director of Gitanjali Gems, one of India’s leading jewellery chains.

Whatever the source, demand is likely to outstrip supply and that means domestic prices could rise.

Premiums paid for imports over international prices could swell to US$50-60 an ounce in coming months from the current US$35-40, said Bachhraj Bamalwa, director with the All India Gems and Jewellery Trade Federation. He sees demand of some 350-400 tonnes over the next five months.

But farmers such as Jagtap may not be deterred by price hikes as they take a longer view of their investment.

“Over the years, my experience is that gold’s value rises,” he said.