India’s gold market: evolution and innovation

About the World Gold Council The World Gold Council is the market development organisation for the gold industry. Our purpose is to stimulate and sustain demand for gold, provide industry leadership, and be the global authority on the gold market. We develop gold-backed solutions, services and products, based on authoritative market insight and we work with a range of partners to put our ideas into action. As a result, we create structural shifts in demand for gold across key market sectors. We provide insights into the international gold markets, helping people to understand the wealth preservation qualities of gold and its role in meeting the social and environmental needs of society. Based in the UK, with operations in India, the Far East and the US, the World Gold Council is an association whose members comprise the world’s leading gold mining companies.

For more information Please contact: World Gold Council B-6/3, 6th Floor, Laxmi Towers C-25 Bandra Kurla Complex Bandra (East), Mumbai 400051, India E: [email protected] T: +91 22 6157 9100 F: +91 22 6157 9199 Alistair Hewitt Director, Market Intelligence E: [email protected] T: +44 20 7826 4741 Krishan Gopaul Market Intelligence E: [email protected] T: +44 20 7826 4704 Louise Street Market Intelligence E: [email protected] T: +44 20 7826 4765 Mukesh Kumar Market Intelligence Group E: [email protected] T: +91 22 6157 9131

India’s gold market: evolution and innovation

Contents 7: Bullion trade Wholesale imports and importers Official import trends Focus Box: Gold pricing in India Smuggling Outlook

55 55 57 58 60 60

8: Gold refining and recycling India’s gold refining landscape Recycling trends Outlook

61 61 64 67

9: Gold mining Gold mining history India gold mineral reserves and resources Future of gold mining in India Economic impact of gold mining

68 68 70 71 72

10: Gold policies A brief history of gold policies Recent developments  Focus Box: India’s latest effort to crack down on black money will have a big impact on gold demand

73 73 75

3: Jewellery market structure 28 Retail market structure 28 Focus Box: The rise of Tanishq 31 Manufacturing market structure 32 Hallmarking34 Outlook35

Appendix 1: Methodology Field research Econometric analysis Consumer insights Market research Gold demand data

79 79 79 79 79 79

4: International jewellery trade 37 Jewellery exports and imports 37 Developing India’s jewellery exports 40 Outlook42

Appendix 2: Indian gold demand: an econometric analysis What drives Indian gold demand? An econometric approach Modelling the long- and short-term dynamics of the Indian gold market

Introduction02 Overview04 Income growth drives gold demand 04 Consumer demand is evolving 05 The gold industry is changing 06 India has a long history of gold-focused policies 07 1: The drivers of Indian gold demand 08 Understanding what drives Indian gold demand 08 India’s demographics 10 Income levels and savings 13 Import restrictions and taxes 14 Inflation16 Agricultural production and monsoons 16 Outlook17 2:  Jewellery demand  18 Types of jewellery 21  Understanding regional, income and demographic differences 22 Focus Box: The changing role of non-resident Indians  24 Outlook27

5: Gold investment market 43 Bar and coin demand 43 Understanding investor motives 46 Gold investment retailing 46 Focus Box: India’s commodity exchanges 49 Outlook50 6: Gold in the financial system Gold monetisation Gold loans Outlook

India’s gold market: evolution and innovation

78

80 80 81

Appendix 3: India’s above ground stocks 86 Methodology 86 India’s gold holdings 86

51 51 52 54

01

Introduction

India is a wonderful country. It is diverse and dynamic. With over 500 million people under the age of 25 it is one of the youngest countries in the world. Yet, at the same time, India has a long and rich cultural heritage, with many gods, deities and beliefs intertwined with the Indian way of life. Gold is part of this way of life. Hundreds of millions of people across India – from large, modern cities through to small rural villages – buy gold for themselves or loved ones throughout the year. Akshaya Tritiya, Diwali, harvests, weddings; gold is central to every one of these. Perhaps its little wonder India has a huge affinity for the global currency, given its long history as a trading nation. But India is changing. Millions migrate from villages to cities every year. Agriculture’s relative importance has declined. Per capita income has increased and millions have been lifted out of poverty. Mobile phones have spread rapidly across the country; with over 220 million users, India is the world’s second largest smartphone market. Millennials think about the world differently to their forefathers. These changes have implications for gold demand.

India’s gold market: evolution and innovation

On top of that, India’s gold market has been subject to huge policy changes over recent years. Sometimes this targets the gold industry, such as the market-distorting 80:20 rule for gold imports in 2013 and 2014. But sometimes it is an economy-wide initiative, such as the forthcoming Goods and Services Tax or 2016’s radical high value currency exchange (or ‘demonetisation’) programme. While recent new policies initiatives have been numerous and varied, they share the same objective: to move India’s informal cash economy towards greater transparency and into the digital age. A challenge facing India’s gold industry is that part of it operates in the grey market. This minority has benefited from anonymity and a lack of transparency on price, purity, taxes and supply sources. As India’s economy presses ahead with its transition to transparency, its gold industry must shed this image and integrate into the mainstream financial system, for gold to serve as a legitimate asset class for millions and play a dynamic economic role. It is clear that India’s gold industry is important to its policymakers. But effective policy needs good data and insight as its foundation. This report aims to provide that, by explaining how India’s gold market works across the entire supply chain – from imports and recycling through to consumer demand – and how it is likely to evolve in the coming years. It also provides an overview of existing gold-related policies and how they have evolved over recent years.

02

Key insights • Economic growth drives gold demand: India was one of the world’s fastest growing economy in 2016. This is key to the health of the gold market. Our econometric analysis of the drivers of Indian gold demand reveals income growth is the most significant factor: as India becomes richer, gold demand increases. • Urbanisation will change the shape of consumer demand: Rural and urban India can be thought of as two distinct markets. Rural India prefers to invest in gold jewellery, while urban India has a greater preference for bars and coins. Rural-to-urban migration will change the shape of consumer demand. • India has a young population with a strong affinity with gold: India has over 45% under the age of 25. And young people think about the world differently from previous generation. But our large-scale consumer research indicates that they do have a strong affinity with gold: when we asked the question what you would buy if you were given Rs50,000, a third of respondents aged between 18–33 said they would invest in gold.

• India’s gold industry is becoming more organised: While it is still highly fragmented, the industry is becoming more organised. Retailers with large regional and national chains are gaining market share. These firms have sophisticated inventory management, wellcrafted advertising campaigns and will be important in ensuring gold meets the needs of modern consumers. At the World Gold Council, we want to support the development of India’s gold industry by working with India’s policymakers to help ensure gold becomes mainstream, and that its positive role in household finance is better appreciated. Currently, policy discussions tend to focus overwhelmingly on import controls, thereby under-leveraging the strengths of a gold culture that is widely prevalent. Policies to enable gold to operate freely in a transparent manner, as part of the organised financial system, are important to realise the broader social and economic objectives. We hope this report provides the data and insight from which effective policies can be developed.

Somasundaram PR Managing Director, India World Gold Council

India’s gold market: evolution and innovation

03

Overview In 2015 India was the world’s fast growing economy; in recent years millions have been lifted out of poverty and India’s middle class has swelled. This is important because our econometric analysis indicates income growth drives gold demand. But India’s relationship with gold goes beyond income growth: gold is intertwined with India’s way of life. And as we look ahead, India’s gold market will evolve. Income growth drives gold demand India’s middle class, consisting of some 200mn to 250mn people, is now one of the world’s largest. The India-based National Council of Applied Economic Research expects this number will exceed 500mn by 2025, while the US-based Brookings Institution reckons India’s middle class consumption will be ahead of the US and China by 2030 (Chart 1).

This is important because India’s economic growth has underpinned its gold market. Our econometric analysis of data from 1990 to 2015 revealed that income levels are the most significant long-term determinant of consumer gold demand: holding all else equal, a 1% rise in income boosts gold demand by 1%. Of course, other factors play a role too. Rising prices, taxes and other barriers can put consumers off, while a good monsoon can boost demand. But income is the dominant macro-economic factor supporting India’s gold market.

Chart 1: By 2030 India will dominate global middle class consumption Share (%) 25

By 2030 India will have the largest middle class in the world – this rising wealth will boost gold demand 20

15

10

5

0 2009

United States

Japan

2020

Germany

China

2030

India

Note: Y-axis represents percentage share of global middle class consumption. Source: The Brookings Institution

India’s gold market: evolution and innovation

04

Consumer demand is evolving Econometric analysis, while helpful, can only tell you so much. India’s relationship with gold is much richer, deeper and more complex than mere macroeconomic variables. For large swathes of the population, gold is intertwined with their way of life. It is deeply rooted in Indian culture: gold purchases are driven by tradition, festivals and other important family and societal occasions. Our 2016 consumer research conducted by TNS identified the top three gold purchase occasions in India to be weddings (24%), birthdays (15%) and religious festivals (12%). Agriculture also plays a significant role in gold demand. Although it only contributes 17% to Indian GDP, it is integral to the rural economy, which accounts for over two-thirds of the population. Finally, there is religion. Gold is seen as a symbol of wealth and prosperity in the Hindu religion. Given all of this, it should come as no surprise that 72% of survey respondents said that they owned fine gold jewellery, 55% had bought gold in the past 12 months, and 51% said they would buy gold jewellery in the next twelve months. In a country as large and diverse as India, there are inevitably variations. The most notable difference to emerge in the consumer research is that between rural and urban India. While the whole of India has a strong

affinity with gold, this is amplified among the rural population; levels of jewellery ownership for example, are significantly higher (Chart 2). And the type of jewellery rural consumers buy is subtly different to that bought by their urban counterparts. Rural Indians have a strong preference for plain gold jewellery, while gold set with precious/semi-precious stones is more popular in urban areas. In 2015, plain gold jewellery accounted for 88% of purchases in rural India. In urban India the figure was 57%, with gem-set pieces accounting for 35% of gold jewellery bought. The investment markets are also different: 22k jewellery is largely used for investment in rural India, while in urban India bars and coins are the preferred gold investment vehicle. There are demographic differences, too. While rural India’s affinity with gold is strong across all ages, it is slightly weaker in urban India for younger generations. If given Rs50,000 to spend, 33% of those aged between 18 and 33 would buy fine gold jewellery, compared with 42% of those aged 34 and over. The fact that a third of young urban Indians are inclined to buy gold jewellery is undoubtedly good; it represents a far stronger market than many other countries. But for some young urban dwellers gold is competing with designer and luxury fashion, and the ubiquitous smartphone.

Chart 2: Gold ownership is higher in rural India and rises with income levels % 100

93

90 80

74

80

76

70 60

60

50

49

International comparison of ownership levels

40

India – 72% China – 70% US – 59%

30 20 10 0 Rs40-99,999

Rs100-399,999

Rs400,000+ Annual income

Rural ownership

Urban ownership

Source: TNS; World Gold Council

India’s gold market: evolution and innovation

05

So what does the future hold for India’s consumer demand? There are risks. For example, millennials in urban India are increasingly tempted by goods other than gold, particularly luxury fashion and smartphones. But this risk is firmly at the margin: young Indians still buy gold. And retailers are alert to their needs, developing online strategies to engage with them, as illustrated by Titan Industries’ acquisition of a majority stake in CaratLane, which will allow the company to enhance its e-commerce capabilities. Given India’s growth trajectory, per capita income will continue to rise, millions more will be lifted out of poverty and its middle class will continue to grow. This will underpin growth in consumer demand. An exciting area of potential growth is in the bar and coin market. Our consumer research indicates that there is large, unmet investment demand. In the absence of any barriers, Indian consumers would invest more in bars and coins, jewellery, and other gold-backed financial products, as illustrated by gold’s share of mind outstripping actual gold investments in 2015 (Chart 3).1

for example. But if the industry tackles these challenges, innovatively thinks of how best to communicate with the consumers and develops seamless purchase journeys, some of this latent demand could certainly be realised.

The gold industry is changing As India changes, so too does its gold industry. In 2000, around 90% of India’s gold retailers were “unorganised.” The industry was dominated by small, standalone retailers, often family jewellers, with limited marketing and advertising. Today, unorganised retailers still dominate the market, but organised retailers have taken greater market share. In 2015, national chains – including Tanishq and Malabar Gold and Diamonds – accounted for around 7% of the market, while regional chains accounted for around 23%. These organised retailers have introduced sophisticated advertising and sales campaigns, effective inventory management systems and domestic and international brands, and have raised standards within the industry. Momentum is with them and they will continue to gain market share. By 2020, the organised share of the market will have risen to 35%–40%.

This is not to say that all of the latent demand can be converted into sales. There are barriers to purchase around price perception and online retailing platforms,

Chart 3: There is strong latent demand for gold investments

26 Rural

+5% 31

+8%

23 Urban

31

+6%

25

Total

31

0

5 Share of investment

10 Share of mind

15

20

25

30

35 %

Latent demand

Source: TNS; World Gold Council

1 For more information on latent demand and share of mind, please see the Appendix.

India’s gold market: evolution and innovation

06

This change is reflected in the manufacturing sector too. At present 5%–10% of India’s gold manufacturing sector could be deemed as being “organised” largescale facilities; 10 years ago these would have barely existed. Nearly 65% of jewellery manufactured in India is handmade and the vast majority of the sector is still characterised by small workshops, each typically employing two to four goldsmiths. But the direction of travel is clearly towards the sector becoming more organised. International buyers, for example, have strict procurement policies that rule out many of the smaller workshops. And the orders from overseas and domestic organised retailers are often large; manufacturers need to be a certain size to be able to process these orders. The most significant change has been in India’s refining capacity. India’s long-established refining sector has seen a sharp rise in new capacity in recent years. The organised refining landscape has grown sharply from a mere three to four refineries in 2013 to 30 refineries in 2015, including one which is LBMA-accredited – MMTC-PAMP. India’s total refining capacity is now above 1,450 tonnes (t), significantly more than India’s average annual gold imports over the past five years. The expansion of the organised refining sector has been supported by a favourable government stance, including a bullion/doré import duty differential. But much of the additional capacity remains under-utilised, largely because of the difficulty in sourcing doré and the limited availability of recycled material. More recently, the government’s favourable stance has weakened a little, with a new tax regime squeezing refiners’ margins.

India has a long history of gold-focused policies Government policies extend far beyond India’s refining sector. India has a long-standing affinity with gold, but gold-policy measures have often been muddled. They usually distort the market without achieving the policies’ aims. For example, the 80:20 rule, which required importers of gold to re-export 20% of imports as gold jewellery, was unwieldy and confusing. The market clammed up. The local price rocketed to a premium of more than US$100 over the global spot price and smuggling boomed. Rather than controlling the flow of gold into India, the policy drove gold into the black market (Chart 4). But some recent developments suggest the policy approach is getting better: the Indian Gold Coin and proposed hallmarking regulations will develop a trusted standard of gold that can be traded more easily. This matters because 86% of consumers say that hallmarking is extremely or very important. These policies also support the Government’s gold monetisation scheme. This scheme is designed to draw some of India’s 23,000–24,000t stock of gold into the financial system. This may provide a boost to the jewellery sector by making gold loans easier to access from banks.

Chart 4: Smuggling increased in response to taxes and trade barriers Tonnes 250

200

The 1% manufacturing excise duty encouraged an increase in smuggling in 2016

Smuggling rose in 2013 in response to increasing import duties and the 80:20 rule 150

100

50

0 2012

2013

2014

2015

2016(F)

Source: Metals Focus; World Gold Council

India’s gold market: evolution and innovation

07

1: The drivers of Indian gold demand Two significant factors influence Indian gold demand over the long-run: rising incomes have a positive effect and higher gold prices have a negative effect. Income is the most powerful factor, and income levels are expected to rise. The IMF has forecast per capita GDP to grow by 35% for 2015–2020,2 and the National Council of Applied Economic Research expects India’s middle class to double, exceeding 500mn by 2025. There are some interesting short-run dynamics too: gold demand is spurred on by inflation, rises with a good monsoon, and is dampened by higher import taxes and other restrictive measures. By 2020 we expect Indian gold demand to average 850t to 950t per annum. Understanding what drives Indian gold demand Gold demand is driven by a combination of factors that interact with each other. These factors are often described qualitatively, but taking a quantitative approach can complement common wisdom and deliver additional insights. As such, we undertook an econometric analysis to understand gold’s demand behaviour. Of course, an econometric analysis helps identify some of the most salient drivers of demand, but not all. In a country as diverse as India, other factors not captured by simple econometric analysis play an important role in shaping gold demand. In this chapter we discuss the findings of our econometric analysis of the long- and short-run determinants of gold demand.3 We also delve into aspects of Indian demographics and economic development that may help us understand not only gold demand today, but also its prospects for the future.

Long-run drivers of gold demand Our analysis, using annual data from 1990 to 2015,4 reveals two significant factors affecting gold consumer demand – jewellery, and bar and coin combined – over the long-term. All else being equal, gold demand is driven by: • Income: gold demand rises with income levels. For a 1% increase in income per capita gold demand rises by 1% • Gold price level: 5 higher prices deter gold purchases. For a 1% increase in prices, gold demand falls by 0.5%. This is intuitive. One would expect gold demand to rise with income and fall with price. But it also highlights the respective strength of these two forces. Demand responds more to income than it does to price. This helps explain why gold demand increased from around 700t in 2000 to around 1,000t in 2010, despite a dramatic increase in the gold price over the period. The impact of the 137% increase in the rupee gold price was outweighed by the 78% increase in per capita income.6

2 IMF World Economic Outlook. April 2016. Forecast in constant prices. 3 For more detail, please see Appendix. 4 Prior to the 1990s, government regulation made gold imports illegal. This changed in 1992, resulting in a structural change in the gold market dynamics. We concentrate on the period starting in the 1990s for three reasons: 1) to have consistent models across the various demand categories; 2) to avoid difficulties modelling the structural shift; and 3) because econometric models using series for which the pre-1990s data is available and seemingly reliable (e.g jewellery) delivered results consistent with those using only post-1990 data. 5 Gold price level refers to the absolute gold price, rather than changes in that price. 6 IMF WEO.

India’s gold market: evolution and innovation

08

Factors affecting Indian gold demand

Long-term factors

1.5

Rising incomes have a positive effect on Indian gold demand and higher gold prices have a negative effect Gold demand and household income

billion

Forecast for Indian population by 2030

Gold demand and gold price

+1 % -0.5%

The Indian middle class is expected to rise to 547 million by 2025

1% increase in income, gold demand rises by 1%

1% increase in prices, gold demand falls by 0.5%

For a

For a

The rise of the young, Indian, middle-class worker is expected to lead to increased gold demand

Indian culture supports gold demand across religions

As the population becomes more urbanised, earning power increases

Higher household incomes boost gold demand

Short-term factors

For a

1% increase in inflation, demand increases by 2.6%

Excess rainfall

Gold price changes

Inflation For a

1% increase in the gold price, 0.9%

demand will decrease by

2

A

1% increase in monsoon rainfall

above the long-run average, boosts gold demand by

0.5%

1 GOLD DEMAND CHANGE (%) -1

Investors around the world turn to gold to protect against inflation. India is no different.

India’s gold market: evolution and innovation

‘13

In the first half of 2013 Rupee gold price fell 20%, while consumer demand leapt 37% year-on-year.

A good monsoon can increase crop yields, sweep money into the rural economy and boost gold demand.

09

Short-run drivers of gold demand There are some very interesting factors that affect gold demand in the short term, too. Holding everything else constant these are: • Inflation: For a 1% increase in inflation, gold demand increases by 2.6%. Investors around the world turn to gold to protect against inflation. India is no different • Gold price changes: For a 1% fall in the gold price, demand will increase by 0.9%. As well as having an effect over the long run, the gold price also affects short term dynamics. When the gold price falls sharply, consumers respond quickly. This is best illustrated by the events of 2013. Between 31 December 2012 and 28 June 2013 the rupee gold price fell 20%. Over the same period consumer demand leapt 37% year-on-year.

This econometric analysis uncovers just some of the fundamental factors that drive Indian gold demand over the long- and short-term. But these should not be viewed as prescriptive; the relationships should be used as a framework for people to understand the broad trends. Greater insight is required to form a more rounded picture. For example, too much rain during a monsoon can be bad for crops; heavy rains in 2013 damaged crops and reduced yields, rather than boosting incomes. The rest of this chapter provides more detail on the drivers of gold demand uncovered by the econometric analysis, as well as some of the other macroeconomic and demographic factors which may affect India’s gold demand in the coming years.

Two other factors affect gold demand, although statistically they are not as significant as the factors described so far:

India’s population is expected to reach 1.5bn by 2030.

• Excess rainfall: A 1% increase in excess rainfall, as measured by the amount of rainfall compared to the long-run average rainfall, boosts gold demand by 0.5%. The monsoon is important for India’s agricultural sector. A good monsoon can increase crop yields, sweep money into the rural economy and boost gold demand • Tax regime: Holding everything else constant, the higher rate of import duties since 2012 have depressed demand by 1.9%. This analysis is heavily skewed by the factors affecting jewellery demand; it accounted for around 80% of Indian gold demand between 1995 and 2014, after all. The factors affecting bars and coins are similar, but subtly different. We touch upon them in more detail in Chapter 5.

India’s demographics India is a diverse country, home to more than 700 7 languages and dialects, and a plethora of faiths and beliefs. While 80%8 of the population follow Hinduism, India is the birth place of Buddhism, Jainism and Sikhism too. This diversity is not captured in the econometric analysis, although market research indicates that levels of gold ownership and consumption patterns do not tend to differ by religion. This suggests that the cultural aspect of gold, which underpins Indian demand, cuts across religious differences. For large swathes of India’s population, gold is intertwined with their way of life.

7 Hindustan Times, July 2013. 8 Census 2011.

India’s gold market: evolution and innovation

10

It has a large population which continues to grow India’s population has grown rapidly. In 1900, its population was 238mn. By 2011 this had increased more than four-fold to over 1.2bn.9 It is the second most populous country in the world and the largest democracy. To illustrate its size, Uttar Pradesh is the most populous state with more than 199mn residents (Chart 5); this is more than Russia. If we add Uttar Pradesh to the second most populous state, Maharashtra, it totals 312mn, similar in size to the US.

India’s economy is expected to benefit from a demographic dividend India’s population is relatively young. More than 45% are below the age of 25 (Chart 6). In China and the United States the figure is closer to one third.10 According to the United Nations, the number of people within the working age population (15–64) will increase as the people within the 0 –14 age range transition to the working population. The UN estimates that by 2050 India’s working population will total 1.1bn.

The rate of population growth, however, is slowing. Between 1991 and 2001 the population grew by 21.5%; this dropped to 17.6% between 2001 and 2011. But it is growing nonetheless and the United Nations Population Fund expects India’s population to reach 1.5bn by 2030.

Chart 5: Top ten states by population

Chart 6: India's population distribution reveals an abundance of youth

Millions 250

Millions 300

These two states are equal to the US

More than 45% of people are under the age of 25; this demographic dividend will boost India's economy

250

200

200 150

150 100

100 50

50

0

ar at

a

15-24

25-54

55-64

G uj

ak at rn

st

ha n

Ka

u Ra

ja

ad

h

il

N

es ad

hy a

0-14 Male

65+ Age group

Female

M

ad

Ta m

es h

Pr ad ra

tB

An dh

es W

Pr

l ga

r

en

Bi ha

ht as ar

M ah

U tta

rP

ra d

es

ra

h

0

Source: Ministry of Home Affairs Census 2011; World Gold Council

Source: CIA World Factbook 2015; World Gold Council

9 Census 2011. 10 CIA World Factbook, 2015.

India’s gold market: evolution and innovation

11

It is likely that India’s youthful population will spur on its economy. There is a wealth of research suggesting that economic growth increases as the number of productive people in the workforce increases – economists refer to this as the demographic dividend.11 This is not just an academic theory. Many economists put the East Asian growth miracle down to the large swell in working-age population between the 1970s and the 1990s.12 India is becoming increasingly urban India’s population is skewed towards rural areas, with 67%13 of Indians residing there. The Central Statistics Office agricultural census estimates that the number of

people employed directly in farming totals 263mn. The World Bank, however, estimates that some 600mn people rely on farming crops or rearing livestock for their income.14 But this is changing. Although the majority of Indians still live in rural areas, an increasing number choose to live in cities (Chart 7). With economic growth centred in larger conurbations, many people – mostly young – have migrated to cities in order to earn better incomes. Urbanisation has also led to an increase in the number of large cities. Cities with a population greater than one million people increased from 35 to 53 between 2001 and 2011.

Chart 7: Urbanisation has accelerated over the last few decades Millions 1,400 1,200

Cities with a population greater than 1 million increased from 35 to 53 between 2001 and 2011

1,000 800 600 400 200 0 1960

1965 Rural population

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Urban population

Source: World Bank; World Gold Council

11 The Handbook for the Indian Economy, Chetan Ghate, Oxford University, 2012. 12 East Asia was one of the world’s fast growing regions during the 1980s and 1990s, in terms of GDP and GDP per capita. This is often referred to as the East Asian miracle. 13 World Bank. 14 www.worldbank.org

India’s gold market: evolution and innovation

12

This matters because cities generate wealth. No country in the industrial age achieved significant growth without urbanisation. Workers in urban areas are more productive and earn more than rural workers. Cities offer large, diversified labour pools and, by having a concentration of educated workers, are more likely to generate new ideas and technologies.15 Urbanisation in India is likely to continue to support economic growth.

Against this backdrop, in 1991 the government started to introduce policy measures that led to the liberalisation of the Indian economy. Red tape was cut away, import tariffs reduced and markets deregulated. This laid the foundations for future economic growth, with GDP growth averaging 7.3% from 2001 to 2010, up from an average of 5.6% in the 1990s.

Yet there is a subtle nuance to India’s urbanisation. It is not just a migration from the countryside to the cities. Rural India has changed too. There has been a growth in semi-urban towns, as well as a rapid development in rural India itself. Population growth in smaller towns and semi-urban centres has outstripped that in metros, supported by better infrastructure, stronger road and rail connectivity, and improved communications.

India’s middle class

Income levels and savings In 2015 India was the fastest growing country in the world; at 7.3% its GDP growth was ever-so-slightly ahead of China’s and comfortably ahead of Western markets. The IMF described it as “the bright spot in the global landscape.” 16 As the econometric analysis identifies, this economic growth underpins India’s gold demand. Liberalisation in the 1990s laid the foundation for economic growth India’s economic history can be divided into two distinct phases: pre- and post-liberalisation. The former covers 1947–1991 when the government followed policies which were bureaucratic, laden with red tape and inward looking. Corruption was rife. India’s annual GDP growth averaged 3%–3.5%.17 Poor economic policies were compounded by droughts and famines. The government had to borrow to finance its deficit to the extent that its debt to GDP ratio hit 75%18 in 1990. The following year India suffered a balance of payment crisis.

15–20%

of population individuals earning

Rs240k–720k pa

total middle class

200–250mn Household incomes have increased The reforms of the 1990s led to better job prospects and higher incomes for millions of Indian households. GDP per capita rose and millions of people were lifted out of poverty. According to the World Bank, the percentage of the population living on less than US$2 per day fell from around 46% in the early 1990s to around 21% in 2011.19 The combination of a large population and rising incomes means India has one of the world’s largest middle classes. Up to date information on the size of India’s middle class is hard to find. In 2010, the National Council of Applied Economic Research (NCAER) estimated that India’s middle class would reach 267mn by 2015–16. The market research group TNS defines India’s middle class as individuals earning Rs240,000–Rs720,000 a year. It estimates that this captures 15%–20% of the population, putting India’s middle class between 188mn and 250mn in 2015. Based on these estimates, it is probably safe to say India’s middle class is between 200mn and 250mn.

15 David Bloom et al, Urbanisation and the wealth of nations, 2008. 16 http://www.imf.org/external/pubs/ft/survey/so/2015/car031115a.htm 17 Ministry of Finance. 18 IMF World Economic Outlook. 19 World Bank.

India’s gold market: evolution and innovation

13

Given India’s demographics and economic trajectory, this large middle class is set to grow. NCAER forecasts that it could reach 547mn by 2025. The Brookings Institution thinks that by 2030, India’s middle class could be the world’s largest, ahead of both the US and China.20 Savings rates are high As income levels have increased, so too has the amount saved. From 1980 through to 2014 the savings rate increased from 18% to 32%, peaking at 37% in 2007. The IMF expects it to stay around 30% up until 2020.21 Thereafter it will likely be bolstered by the swelling ranks of the working-age population.

Import restrictions and taxes

gold related policies, please see Chapter 10.) Why did these restrictions come about? To understand we need to consider India’s trade balance and current account deficit. India’s current account deficit increased from the 1990s onwards Prior to economic liberalisation in 1991, the country suffered from inward-looking policies. India had very little trade with the world during the early 1990s, instead focusing on protecting its domestic industry. In sharp contrast, post-liberalisation has seen the share of exports double in overall GDP terms, whilst imports increased even further. The trade balance in the early 1990s was less than Rs100bn, but it has since increased to Rs8,423bn in 2014–15, peaking at over Rs10,000bn in 2012–13 (Chart 8).

In 2013 the Congress government began to ratchet up gold import restrictions, starting with import duties before moving on to a complex set of rules governing gold imports and exports. (For more information on India’s

Chart 8: India’s trade deficit increased following trade liberalistion in the 1990s Rupees bn 2,000 0 -2,000 -4,000

Economic liberalisation in the early 1990s boosted economic growth and trade

-6,000 -8,000 -10,000 -12,000 1988-89

Total trade balance

1994-95 Oil

2000-01

2006-07

2012-13

Non-oil

Source: Director General of Commercial Insights and Statistics; World Gold Council

20 Bookings Institution,The Emerging Middle Class in Developing Countries, 2011. 21 IMF World Economic Outlook, April 2016.

India’s gold market: evolution and innovation

14

One of the biggest components of India’s imports is crude oil. Given the need to import more than 90%22 of its crude oil consumption, oil contributes nearly one third of India’s import bill. The second largest part of the import bill is gold. Imports of gold increased to Rs2,107bn in 2014–15 from a low of Rs24bn in 1996–97.23 Between these two dates gold accounted for, on average, 8% of total imports (Chart 9). Despite the high dependence on imports the current account deficit (CAD) was typically under control. This changed during the late 2000s: the economic slowdown in Europe, spiralling oil prices and rising gold imports caused the CAD to balloon. It increased to Rs4,796bn in 2012–13 from less than Rs116bn in 2000–01.24 The current account deficit rose to 4.7%25 of GDP in 2012–13 (Chart 10).

These gold-specific import restrictions had a few effects. First, as highlighted in the econometric analysis, gold demand eased a little. This was largely because the import duties and 80:20 rule pushed up the premia in the local market, created uncertainty and, at the margin, deterred some potential gold buyers.

Chart 10: India's current account deficit

Chart 9: Gold imports in India Rupees bn 3,000

% 20

Gold imports have accounted for an average 8% of total imports

2,500

Misplaced government policies tried to reduce the CAD by restricting gold imports The government was forced to take action. A raft of import restrictions were imposed, including on gold. Duties on gold imports were steadily increased, rising from 2% to 10% between January 2012 and August 2013. Soon after, the government implemented the unwieldy and market-distorting 80:20 rule, whereby those importing gold were required to export 20% as jewellery.26

Rupees bn 1,000

% of GDP 2

0

0

-1,000

-2

-2,000

-4

15 2,000

1,500

10

The current account deficit peaked at 4.7% of GDP in 2012 –13

-3,000

1,000

-6

5

-1 5 14 20

-1 3 12 20

-1 1 10 20

9 20 08 -0

7 20 06 -0

-0 5

-10

3

-5,000

04

% of total imports (rhs)

0 2014-15

20

Gold imports

2008-09

1

2002-03

-8

20 02 -0

0 1996-97

-4,000

20 00 -0

500

Current account deficit, Rupees bn Current account deficit as % of GDP (rhs)

Source: Department of Commerce; World Gold Council

Source: RBI; Economic Survey 2015-16; World Gold Council

22 Ministry of Commerce, Ministry of Finance, 2015. 23 Department of Commerce, Ministry of Commerce and Industry. 24 Reserve Bank of India. 25 Ibid. 26 The 80:20 rule came into effect on 22 July 2013 and was in force until 28 November 2014.

India’s gold market: evolution and innovation

15

More importantly, the restrictions drove parts of the gold supply-chain underground. Smuggling increased sharply. Between Q3 2013 and Q4 2014 around 335t of gold was smuggled into the country. So while official imports into the country fell, unofficial imports increased. It is true that the current account deficit narrowed (Chart 10) during this time, but with huge inflows of gold being smuggled into the country, the efficacy of the import restrictions must be called into question. (Please see Chapter 7 for more detail on gold smuggling.)

Agricultural production and monsoons Agriculture is a key component of the national economy, especially the rural economy. As mentioned previously, the World Bank estimates some 600mn people rely on farming crops or rearing livestock for their income. The econometric insight that the monsoon has an impact on gold demand in the short-run comes as no surprise. But these factors are probably not as significant to gold demand as they once were. The importance of agriculture has waned a little As India has urbanised, agriculture’s share of GDP has steadily declined from 45% in the 1970s to 17% in 2015. In recent years, services, especially IT, have come to the fore (Chart 12).

Between Q3 2013 and Q4 2014

c335t

of gold was smuggled into India.

600mn people rely on farming for their income and there is a deep rooted tradition of investing in gold for this sector.

Inflation Inflation has been a problem for India, regularly spiking to 10% and above since 1980 (Chart 11). Industrial expansion and high food prices have led to inflationary pressures, which have caused economic uncertainty. Given its attributes as an inflation hedge, Indians have turned to gold in order to protect their wealth, and that of future generations.

Chart 11: Indian CPI% change per annum

Chart 12: Agricultural sector declining contribution to GDP (value added, % of GDP)

YoY% change 16

% of GDP 50 45

Industrial expansion and volatile food price underpin high inflation

14

40

12 35 10

30 25

8

20

6

15 4 10 2 0 1980

In 2015 agriculture accounted for just 17% of GDP, but supports some 600mn livelihoods

5

1985

1990

1995

2000

Source: IMF; World Gold Council

India’s gold market: evolution and innovation

2005

2010

2015

0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 Source: World Bank; World Gold Council

16

Nor is rural India completely reliant on agriculture. In recent years, rural areas have developed better infrastructure and transport links, which have allowed manufacturing to become a more important part of the rural economy.27 According to a 2012 Credit Suisse report, between 1999 and 2009, 70% of all new manufacturing jobs and 55% of India’s manufacturing GDP came from rural India.28 There are support mechanisms in place to protect farmers from weak monsoons But agriculture is still important and the monsoon plays a key role in the economy. Even though India is no longer an agrarian economy, the lack of proper irrigation in many areas means large parts of agriculture are still dependent on monsoon rains. In the absence of modern farming techniques a deficient monsoon can have adverse effects on the Indian rural economy and, consequently, its gold demand. Politicians are aware of the impact a deficient monsoon can have on large numbers of farmers and there are mechanisms in place to protect rural incomes in such an event. The government-owned Food Corporation of India aims to protect farmers from sharp drops in food prices, via the Minimum Support Price (MSP). This long-standing scheme provides a price-floor for a number of key crops. In early 2016, Narendra Modi’s government introduced a re-vamped crop insurance scheme, which aims to reduce premium charges and increase payouts to farmers in the event of natural disasters such as drought.

Outlook The outlook for gold demand is good. Our analysis indicates that per capita income is one of the most significant factors underpinning gold demand and will increase over the coming years: the IMF expects growth of 35% from 2015 to 2020. More generally, India’s middle class will grow. The NCAER expects it to reach 547mn by 2025. India’s economic growth will be supported by strong, structural factors. The first is demographic. India’s economy will receive a boost as its youthful population enters the work force. The slow, but steady trend of urbanisation will continue to support economic growth by offering higher incomes than rural areas and fostering an environment in which workers can create new ideas and technologies. There will inevitably be short-term fluctuations. Consumers will respond quickly to changes in the gold price and the vagaries of the monsoon will continue to play a role: a good drenching will boost demand, while a disappointing drizzle might cause the rural economy to sputter. And of course there are risks. Any tightening in gold-related policies, such as the measures that have recently been implemented to regulate and formalise the gold industry, are disruptive and will stifle demand in the short to medium term (please see Chapter 10 for a discussion of gold policy). But given that income is the most significant factor affecting Indian gold demand, and the outlook for income growth is good, we expect India’s gold demand to remain robust at between 850–950t by 2020.

27 Indian Council for Research on International Economic relations, Is manufacturing moving away from India’s cities, 2012. 28 Credit Suisse, India Market Strategy, The great Indian equalisation, 19 April 2012.

India’s gold market: evolution and innovation

17

2: Jewellery demand India is one of the world’s largest gold jewellery consumers, outstripping the combined jewellery demand of the Middle East, Europe and the US. Demand typically peaks in October and November, when the marriage season, harvest and Diwali overlap. India’s diversity is reflected in its jewellery consumption, with rural India accounting for around 60% of jewellery demand. The outlook for jewellery demand is good. Consumer research indicates latent demand and a healthy interest from the younger generation of Indian consumers. Jewellery demand India is the second largest jewellery market in the world In 2015, India bought 663t of gold jewellery, second to China, but comfortably ahead of the US, Europe and the Middle East combined. Over recent years, it has consistently been one of the world’s largest gold jewellery consuming countries (Chart 13).

Beyond its sheer size, India’s jewellery market is incredibly diverse: heavy, chunky 22k chains are common in Kerala while lighter, bejewelled pieces are popular in Rajasthan. As well as the diversity in taste, appetite for purchasing gold jewellery also varies, with southern regions accounting for around 40% of all of India’s demand.

Chart 13: India is one of the largest jewellery consuming nations in the world Tonnes 1,000

In recent consumer research 79% agreed with the statement that gold will never lose its value over the long term

900 800 700 600 500 400 300 200 100 0 2010 India

2011

Middle East, US and Europe

2012

2013

2014

2015

China

Source: Metals Focus; GFMS, Thomson Reuters; World Gold Council

India’s gold market: evolution and innovation

18

For all this diversity, one thing is clear: 22k gold jewellery is prominent in the nation’s jewellery box. In our 2016 consumer insight study 72% of respondents said they owned fine gold jewellery. Silver came a close second at 70%, with diamond and platinum jewellery a lowly 24% and 14% respectively. Among people who had bought gold jewellery in the past 12 months there was a strong preference for plain gold jewellery, which made up 74% of all gold jewellery bought. This, however, is a snapshot in time, and does not capture the changing dynamics of India’s jewellery market. With rising disposable incomes over recent years, consumers have become more adventurous. Although platinum and diamond jewellery have low penetration rates, pieces set with diamonds or other precious stone are more popular than they were in the past, especially in urban India. The increasing popularity of high-end gold jewellery – such as designer or gem-set jewellery – is also testament to changing tastes.

Seasonality: the importance of marriages, religious festivals, and agriculture Gold is deeply rooted in Indian culture. Gold purchases are driven by tradition, festivals and other important family and societal occasions. In a 2014 ICE360º survey, the two most important motives for buying gold were gifting (46%) and a child’s future wedding (27%). It is likely that many of those identifying gifting as a motive would gift gold at weddings other than that of their children. This assumption is supported by the TNS consumer research in 2016, which identified weddings (24%), birthdays (15%) and religious festivals (12%) as being the top three purchase occasions in India. It should come as no surprise, therefore, that between 40% and 50%29 of gold purchases in India – either jewellery or bars and coins – are for marriages, and that gold jewellery demand tends to peak in the run up to marriage seasons (Table 1).

But why does India have such a large and vibrant jewellery market? There are several reasons. Most important are the long-standing cultural traditions, which intertwine gold with the Indian way of life. This includes weddings, religious events – such as Diwali – and agriculture and harvest seasons. Crucially, over and above other metals, gold jewellery is viewed as an investment as well as an adornment. Of those surveyed in our proprietary 2016 TNS consumer survey, 79% agreed with the statement that gold will never lose its value over the long term and 76% agreed with the statement gold makes me feel secure for the long term. When we looked at India’s investment market, 38% of respondents invested in gold via 22k jewellery, illustrating the dual role of 22k jewellery in India. Contemporary bridal choker in 24k gold made with a combination of traditional nakashi (repoussage) work, filigree and bezel set kundan work.

29 Metals Focus.

India’s gold market: evolution and innovation

19

Agriculture and the monsoon also play an important role in gold demand.30 Although agriculture only contributes 17% to India’s economy, it is highly significant for the rural economy, which accounts for over two thirds of the population.31 For a large percentage of crops, the harvesting season lasts from September to November. Once rural Indian communities have harvested and sold their crops, a portion of the proceeds are invested in gold, typically jewellery: in rural India 46% of respondents to the TNS survey said they had invested in 22k gold jewellery and just 11% had invested in bars and coins. The picture is different in urban India, with bar and coins being the more popular method of gold investment (please see Chapter 5 for more detail).

cloths with gold coins flowing from her hands. Many Hindus consider gold an auspicious metal, which they like to buy or give to loved ones during religious festivals. The most important of these is Diwali, which marks the beginning of the Hindu New Year, and usually takes place in October or November.

Finally, there is religion. Gold is seen as a symbol of wealth and prosperity in the Hindu religion. Lakshmi, the goddess symbolising fertility, productiveness and prosperity, is said to have been bathed by elephants that carried pure water in golden vessels. Visually she is golden: she has a golden complexion and she is dressed in gold-embroidered red

As shown in the heatmap below, the combination of the wedding season, harvests 32 and festivals 33 means that gold jewellery buying tends to be concentrated in April–June and September– January (Table 1).

Akshaya Trithiya is another important event. This is one of the most auspicious days in the Hindu calendar – usually late April/early May in the Gregorian calendar – and gold purchases on this day are considered propitious. Many retailers use Akshaya Trithiya to promote gold via increased advertising and promotional discounts on labour charges.

Table 1: Jewellery demand peaks between September and November Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Gold buying: Festivals Marriages Harvests

Rabi crops

Kharif crops

Indian jewellery segmentation

30 For more information on the role of agriculture and the monsoon, please see Chapter 1. 31 World Bank. 32 Ugadi/Gudi Padwa (late April/early May) marks end of Rabi crop harvesting and start of sowing of kharif crops. Onam (late August/early September) is Kharif crop harvest festival celebrated in Kerala. 33 Makara Sankranthi (January), Akshaya Tritiya, Dassera (October) and Diwali/Dhanteras are gold buying festivals in India.

India’s gold market: evolution and innovation

20

Types of jewellery Jewellery consumption falls into three distinct types: bridal, daily wear and fashion. Each market boasts its own characteristics, as well as different products, sizes and designs. When measured by number of sales, bangles and chains are the most popular items, but when measured in gold content, necklaces are most important (Table 2). The importance of bridal gold jewellery If we analyse the gold jewellery market by purpose, the importance of weddings and bridal wear is clear (Table 3). Around 40%–50% of gold jewellery and bars and coins bought in India is for weddings. Although there are no official figures for the number of weddings, it is likely to be between 8mn and 10mn per annum.34 Whatever the exact number, we should expect it to increase. India has an extremely young population, many of whom have yet to be married. According to the CIA Factbook, 28% of the population is under the age of 14, while 18% are between 14 and 24. That translates to more than 500mn people under the age of 25. With the average marrying age for females at 22, the number of weddings per annum should grow.35

Buying gold jewellery for an Indian bride is based on the concept of streedhan – loosely translated as property that a woman obtains at the time of marriage, given to the bride as security, which is hers to keep. An additional, albeit much smaller, element of weddingrelated gold jewellery demand comes from jewellery gifted to the immediate family of the bride and groom, as well as jewellery that wedding guests may buy to wear themselves to the wedding. Given bridal jewellery’s dominant market share, gold jewellery demand tends to be concentrated in the months and weeks approaching the marriage season and during the season itself. However, the behaviour of wedding purchasers has changed over recent years. With gold prices having risen over much of the past 15 years, it has become increasingly common for families to make regular purchases of gold bars and coins, which are then converted into bridal jewellery as the wedding nears. This ‘exchange’ activity is not captured as jewellery demand because it does not represent new gold demand, rather a transformation of gold from one form to another.

Table 2: Retail sales by jewellery type Category

% of retail sales

Range of weights (gm)

Most common weight sold (gm)

Necklaces

15%-20%

25gms-250gms

30gms-60gms

Bangles

30%-40%

8gms-25gms

10gms-15gms

Chains 36

30%-40%

10gms-50gms

10gms-20gms

Earrings

5%-15%

2gms-30gms

3gms-8gms

Finger rings

5%-15%

2gms-15gms

3gms-7gms

Source: Metals Focus; World Gold Council

Table 3: Segmentation of jewellery Market share by weight Caratage Size

Bridal

Daily wear

Fashion jewellery

50%-55%

35%-40%

5%-10%

22k, 23k, 18k

22k, 18k

18k, 14k

30gms-250gms

5gms-30gms

5gms-20gms

Small sets: 30gms-60gms

Chains: 10gms-20gms

Chains: 8gms-15gms

Large sets: > 60gms

Necklace: 20gms-30gms

Pendants: 1gm-3gms

Earrings: > 15gms

Earrings: 5gms-8gms

Earrings: 3gms-5gms

Bangles: > 30gms

Bangles: 10gms-25gms

Waist bands: > 40gms

Pendants: 5gms-10gms

Bindi chains: > 40gms Source: Metals Focus; World Gold Council

34 In our report An introduction to the Indian gold market published in 2001 we estimated there to be eight million weddings per annum. More recently, some commentators have estimated it to be around 10 million per annum. 35 Ministry of Health and Family Welfare. 36 Chains, usually considered daily wear and worn by men and women, are lightweight. In contrast, necklaces are heavier pieces, which can be studded or intricately carved, worn by women during marriages and festivals.

India’s gold market: evolution and innovation

21

In a country with such a rich and diverse culture, wedding jewellery tastes vary considerably Table 4 provides a granular assessment of wedding jewellery tastes by region.

Mumbai, Chennai and Kolkata. Nevertheless, this category is not expected to gain a meaningful foothold in the gold jewellery market.

The growth in gold plated jewellery demand Demand for gold plated jewellery, or “gram gold,” is very small. But it has increased over the past 10 years. The steep rise in gold prices encouraged low income consumers, especially those in Tier two or three cities, to shift towards alternative daily wear. In recent years the category has expanded to include bridal jewellery. And there has been a steady increase in the number of shops offering these products in more prominent cities, such as

Understanding regional, income and demographic differences Regional demand Around two-thirds37 of Indian gold demand is concentrated in rural areas – a fact that is largely a reflection of India’s demographics. According to the World Bank, in 2015, 67% of India’s population lived in rural areas, down from 72% in 2010 and 74% in 1990.38

Table 4: Wedding jewellery tastes by region

Bangles

Earrings

Chains

Small necklace

Large sets

Kundan Kangan, Ancia Kangan

Kaan Matti

Mangal Sutra

Choker

Choker

Anguthi, Nathn, Baju Band, Benda

200gms

Mangal Sutra

Diamond Haar

Maang Teeka, Nathni, Bajo do Kado

190gms

Mangal Sutra

Chapla Haar, Laxmi Haar

Aangathi, Haath Pan, Nath, Baju Band

250gms

Nath, Baju Band, Damani, Pocha

180gms

Sita Haar

Kamar Chavi, Tikloy, Kamar Band

210gms

Rani Haar

Rakhdi, Haath Phool, Baju Band, Anguthi

190gms

Nakshi Haram

Aravanki, Nakshi Vaddanam, Jada

300gms

Akki Sara, Malliga Sara

Bandhi, Odiyanam, Kemp Ungila

280gms

Lakshmi Haram, Muthu Haram

Ottiyanam, Nethichutty, Jadai Billai

300gms

Kazuthulia, Kasu Kingini Mala, Mala, Lakshmi Manga Mala Mala, Mulla Motu

Toe Ring, Minnu

320gms

Bride Uttar Pradesh Bride Sindhi Bride

Kundan Kangan

Maharashtrian Bride

Vala

Tode, Patli

Jhumke

Gujarati Bride

Bangdi, Kundan Bangdi

Kundan Butti

Bengali Bride

Plai Bala, Mugh Bala, Chitra Bala

Jhumkaa

Rajasthani Bride Andhra Bride

Bangdi, Kada, Rajputi Bangdi

Kerala Bride

Mangal Sutra

Kundan Butti Buttalu

Sutaru Golusu

Jhimki

Mangal Sutra, Mohan Sara

Kolkata Bangle, Machine cut Bangle, Thoda Bangles

Kempu Kal Jhimkki

Jhimki

Chandan Haar

Thewa

Lakshmi Bale, Coorgi Bale, Kembina Bale Muthu Valayal, Lakhsmi Valayal, Kemu Valayal

Tushi

Gola Chik

Kangan, Gajalu

Mangalore Bride

Tamilian Bride

Gross weight (Average upper middle class Others consumption)

Mangal Sutra Kurumulaka Mala, Patthakam

Kandabaranam

Vella Kal Mookhuthi

Source: Malabar Gold and Diamonds; Metals Focus; World Gold Council

37 Metals Focus. 38 www.worldbank.org

India’s gold market: evolution and innovation

22

Southern India dominates India’s gold jewellery consumption, accounting for nearly 40%39 of the total volume, and it is likely that per capita gold consumption is highest in southern India too. This is supported by the TNS consumer research, which revealed that southern India had the highest gold-ownership rates (76% of survey respondents said they owned gold jewellery) and the highest rate of purchase in the past 12 months (60% had purchased gold jewellery in the previous 12 months). Demand in the southern states is supported by relatively high levels of wealth. Kerala and Tamil Nadu, for example, have lower than average poverty levels.40 They also have higher than average per capita income 41 and both benefit from strong non-resident Indian demand. (Please see Focus Box). Southern India is predominantly a 22-carat traditional, handmade market, and remains the most homogenous marketplace in the country. Eastern India has an estimated 15% market share. Unlike the south, however, the eastern part of the country remains economically under-developed. It has higher levels of poverty, lower levels of per capita income and lower levels of literacy. Given the traditional nature of gold consumption in southern and eastern India, there is limited demand for anything beyond plain 22k jewellery.

Table 5: Regional tastes in gold jewellery Market share Caratage Important centres

South

East

West

North

40%

15%

25%

20%

22k

22k

22k, 18k, 14k

23k, 22k, 18k, 14k

Mumbai, Ahmedabad

New Delhi, Jaipur

Chennai, Hyderabad, Cochin, Bangalore

Kolkata

Source: Metals Focus; World Gold Council

In contrast, northern and western India, with 20% and 25% of demand respectively, have quite diverse markets. Unlike southern India, there is a larger market for 18k and 14k gold, especially north of the Vindhyas. Rural and Urban India As well as regional variations there are quite stark differences in consumption behaviour between rural and urban India. While the whole of India has a strong affinity with gold, it is amplified in rural India. Levels of ownership, for example, are significantly higher in rural India (Chart 14). While the whole of India has a strong intention to buy, rural Indian consumers are far more likely to buy gold in the next 12 months than their urban counterparts. And the type of jewellery they buy is subtly different. In the past 12 months plain gold jewellery accounted for 88% of purchases in rural India. In urban India the figure was 57%, with gold set with precious/semi-precious stones accounting for 35% of gold jewellery bought. This matters because as India changes, so too will its jewellery market. As outlined in Chapter 1, India is becoming increasingly urban. The differences highlighted here might give an indication of what India’s jewellery market will look like in the coming years.

Chart 14: Gold ownership is higher in rural India and rises with income levels % 100

93

90 80

74

76

70 60 50

80

60 49

40

Plain gold jewellery accounted for 88% for gold purchases in rural India in 2015; in urban India the figure was 57%

30 20 10 0 Rs40 – Rs99,999

Rs100 – Rs399,999

Rural ownership

Rs400,000+ Annual income

Urban ownership

Source: TNS; World Gold Council

39 Metals Focus. 40 According to the RBI in 2012, 22.9% of the population lived in poverty in India. In Kerala it was 9.1%, in Tamil Nadu, 15.8%. 41 According to the Central Statistics Office, Tamil Nadu’s per capital income in 2013–14 was Rs112,664; Kerela’s Rs103,820. This compared to a nationwide average of Rs74,380.

India’s gold market: evolution and innovation

23

Focus: The changing role of Non-Resident Indians in the jewellery sector The role of Non-Resident Indians (NRIs) has changed dramatically since the abolition of the Gold Control Act (GCA) in 1990 and the opening up of Indian gold bullion imports.42 Prior to its abolition, NRIs were the main carriers of gold into the country, both officially and otherwise. Broad estimates put the supply of gold from NRIs during the 22 years of the GCA regime at around 1,000t.

Following these regulatory changes, NRIs morphed into gold consumers. India’s global diaspora and the rise in incomes earned in countries like the US, UK and the Middle East, makes them an important driver of gold demand. Many NRIs prefer to come to India to buy gold, attracted by better designs and more competitive pricing due to lower labour charges and taxes.

The NRI scheme, introduced in 1992, permitted returning NRIs to import up to 5kg of gold bars and other approved gold items, as long as they had been away for at least six months. After 1997, the allowance was increased to 10kg. Between 1992 and 1997 NRIs brought in around 1,300t.

Jewellers in states with large NRI populations – Punjab, Gujarat, Maharashtra, Telangana, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala – believe that NRIs make up between 10% and 20% of their sales. Gold buying by NRIs is concentrated during the periods of Diwali, Ramzaan43 or Christmas, as many of them return home to celebrate these festivals with their families.

The dependence on NRIs fell dramatically following the introduction of the Open General Licence (OGL) scheme in 1997. This allowed 20 banks and four public sector bodies to import gold. By 2001, 99% of gold imported into India was through the OGL scheme.

Higher taxes levied on gold during 2013–2014 hit this market, with many NRIs deciding to buy elsewhere. For example, in the UK there was a rise in 22-carat hallmarking reflecting NRIs choosing to buy in the UK rather than India.44

Smaller pieces of 22k and 24k jewellery are popular for everyday wear. (Copyright World Gold Council) 42 A Non-Resident Indian – NRI – is defined as an Indian national who has lived outside of India for at least six months. 43 Ramzaan is the Hindi name for Ramadan. 44 Metals Focus.

India’s gold market: evolution and innovation

24

Buying patterns across income levels Gold consumption differs across income levels. As outlined in Chapter 1, India has one of the largest middle classes in the world. We estimate it to be around 250 million and, given India’s demographics and likely economic trajectory, it is set to grow. Through field research and conversations with the jewellery trade, Metals Focus estimates that around 50% of gold jewellery purchases are accounted for by this cohort. Consumer research backs this up. A recent ICE360º survey found that while three-quarters of households purchased gold less than once a year, financially well-off, highly educated and regular income-earning households bought gold more frequently (Chart 15). The extension of this trend is that those with higher incomes remain very active gold buyers, accounting for around 30% of gold jewellery sales. Again, this is supported by consumer research. The 2016 TNS

research found that around half of respondents with an annual income between Rs40,000 –Rs99,999 (52%) and Rs100,000–Rs399,999 (47%) said they intend to purchase gold jewellery in the next 12 months. This increased to 57% for those with an annual income in excess of Rs400,000. And a piece of research Kadence executed on our behalf in 2013 and 2014 found that the highest earners – those earning more than Rs500,000 per annum – were most likely to buy gold in the next 12 months: 41% said they definitely would, compared to an average of 24% across all income levels. They are also the least likely to sell gold jewellery. Interestingly, the jewellery tastes of the higher earners are slightly different to those of the middle class. Diamond and studded jewellery find favour, and they are more likely to buy high-end and imported branded jewellery.

Chart 15: Consumers who are most confident in their household income buy gold more % 18 16

Households more confident in their income are more likely to buy gold at least once a year

14 12 10 8 6 4 2 0 Most confident

Confident

Less confident

Least confident

Percentage of households who purchase gold annually or more frequently *Confidence about stability in major source of household income. Source: People Research on India's Consumer Economy (PRICE); World Gold Council

India’s gold market: evolution and innovation

25

Finally, we look at lower income levels – India’s largest contingent. Even though this segment has a limited potential to buy gold, there is a still a strong inclination to do so. In rural India, 58% with low annual incomes (defined as between Rs40–Rs99,999) said they intended to buy gold in the next 12 months. Because of their limited resources, they are more likely to buy smaller articles, such as bangles, chains or earrings, or gram gold. Buying patterns across age groups At a high-level there is remarkably little difference in attitudes towards gold jewellery across age ranges. Our 2012 Usage and Attitudes study indicated that gold dominates the jewellery boxes of young and old alike, and attitudes – such as consumers’ perception of gold and commitment to continue to purchase it – are similar across life stages. The 2013–14 Kadence survey supports this assessment. Those surveyed in the 18–34 age group were just as likely to buy gold in the following 12 months as were older generations. We can try to understand this by considering what influences consumer purchase decisions. One of the revealing insights from the Usage and Attitudes study was that across key events – such as marriages, birthdays, anniversaries and engagements – two of the top three factors which influenced a consumer’s purchase were:

It is likely that these factors reinforce the cultural and traditional aspects of gold. The third influence was more spontaneous: rather than seek advice, people saw gold jewellery in a shop and bought it. But this doesn’t paint the whole picture. The younger generation in urban India has subtly different tastes. When offered Rs50,000 for a discretionary purchase, 42% of consumers over the age of 34 in urban India said they would buy gold jewellery. This dropped to 33% for millennials aged between 18–33. The fact that around a third of younger consumers would choose to buy gold jewellery if they were given Rs50,000 is still very positive (Chart 16), but it suggests that the younger generation of potential consumers have temptations other than gold to consider. What is the competition for gold amongst the younger generation? As with higher-income earners, the answer lies partly with diamonds and gem-studded jewellery. But it also includes other luxury items, such as designer clothes, handbags and shoes, silk sarees, and the ubiquitous smartphone.

i) Family tradition; and ii) Receiving advice from friends and family.

Chart 16: Percent of respondents in urban India who would buy gold jewellery if given Rs50,000 % 45

42%

40

33%

35 30 25 20 15

33%

A third of millenials would buy gold jewellery if given Rs50,000. The comparable figure in the US is 6%

10 5 0 Young millenials (18-25)

Older millenials (25-33)

Older (34+)

Source: TNS; World Gold Council

India’s gold market: evolution and innovation

26

This potential threat should not, however, be overstated. The competition for gold spend remains firmly at the margin, although retailers are alert to the risk. As explained in Chapter 3, many retailers are targeting younger, urban consumers by promoting lighter weight jewellery products, including specific ranges designed to appeal to teenagers – for example, Malabar’s Starlet range. Others are targeting internet users and selling lighter pieces online.45

jewellery consumers were asked about their attitudes towards gold jewellery, assessed gold jewellery’s ‘share of mind’ – that is, what luxury and fashion items would consumers choose to buy in the absences of any barriers – and compared it to what was actually bought in the previous twelve months. The research revealed that there is strong latent demand in urban India, which jewellery firms should focus on converting into sales. It also revealed slight weakness in rural India, but the margin was negligible (Chart 17).

Outlook What does the future hold for Indian gold jewellery demand? There are clearly some uncertainties. Changing demographics are cited as potential risks. Younger generations of consumers may be tempted by other products, be that different styles of jewellery or luxury fashion accessories. But this risk should not be exaggerated. It is only at the margin that other, competing products may tempt a prospective jewellery customer. Gold ownership continues to be deeply entrenched in Indian customs and traditions: after all, a third of people under the age of 33 would buy 22k gold jewellery if they were given Rs50,000.

And at a macro level, there are powerful forces that should support and boost demand. As a lower-middle income country, India is on a steady trajectory of income growth. Per capita GDP is expected to increase by around 35%46 by 2020, while India’s middle class is set to swell to over 500mn by 2025. Millions are being drawn out of poverty. According to the previous government’s Finance Minister, P Chidambaram, the Congress government’s greatest achievement was lifting 140mn people out of poverty between 2005 and 2014. Rising income levels will support gold demand. The middle class is the most significant gold consumer and India’s middle class is set to become the world’s largest by 2030.

When considering the consumer, there is room for the market to grow, led by latent demand in urban India. Our consumer research, in which more than 2,000 Indian

Chart 17: Latent jewellery demand in urban India offsets slight weakness in rural India

20 Rural

19

9 Urban

-1%

+3% 12

14

Total India

+1% 15

0

5 Share of purchase

Share of mind

10

15

20

25 Percent

Latent demand

Source: TNS; World Gold Council

45 For example, please see www.bluestone.com, www.jewelrybazaarinc.com, www.wearyourshine.com 46 According to IMF data, between 2015 and 2018 per capita GDP is expected to grow by 18% in rupee terms at constant prices and by 23% in dollar terms at constant prices.

India’s gold market: evolution and innovation

27

3: Jewellery market structure India’s gold jewellery retail industry is highly fragmented. There are a few regional and national chains, but small, independent retailers take the lion’s share of the market. Slowly, this is changing. Over the coming years, organised retailers will increase their market share. The country’s manufacturing industry is fragmented, too; most are small goldsmiths employing just a few people. They are highly skilled though. Cities often specialise in crafting jewellery out of specific materials, be that gold, silver, diamonds or pearls. But the sector faces challenges. Small gold manufacturers often struggle to access gold loans, the jewellery industry struggles to access bank finance, and the industry suffers from poor infrastructure. Retail market structure India’s retail jewellery industry is highly fragmented, but this is changing Industry participants recognise that there are two parts to the market: organised and unorganised. Organised retailers are typically characterised by having a chain of stores with a regional or national presence47 and a strong brand, courting largely urban customers through sophisticated advertising campaigns. Some, such as Amrapali Jewels, also have international brands. Retailers in the unorganised sector are usually smaller, standalone entities, such as small goldsmiths, family jewellers or designers focusing on high-end products. The majority – around 70% – of India’s jewellery industry can be categorised as unorganised (Chart 18).

Chart 18: Jewellery market landscape in India 48 7% 5%

23% Outer ring: 2015 Inner ring: 2000

95%

70%

38%

Stand alone jewellers and medium sized retailers Regional chains National chains Source: Metals Focus; World Gold Council

47 National chains are jewellers who have pan-India presence and differentiate on the basis of trust and brand name. Regional jewellers form chains that are situated in particular regions such as north or south, but focus on branding as well as personalised service. 48 Metals Focus.

India’s gold market: evolution and innovation

28

It is difficult to accurately quantify the number of jewellers across the country. The industry’s highly fragmented nature and very long tail of small retailers make it quite opaque and hard to gain full visibility. Even estimates by trade associations can vary considerably on a state-bystate basis. In order to form our own estimate we undertook a granular, bottom-up approach reviewing data on Justdial, a pan-India search services company. Based on this analysis, we estimate there are between 385,000 and 410,000 jewellers in India.49 This figure resonated with the industry during the round table discussions held in Mumbai, Kochi and Delhi.50 In contrast, there are only 125,857 bank branches.51 Table 6: Organised retailers‘ presence 52 Name

Stores

Tanishq (Including Zoya)

Cities/towns

195

111 

GOLDPLUS

32

31

PC Jewellers

58

48

Shubh Retail

80

N/A*

Malabar Gold and Diamonds

80

69

Kalyan Jewellers

68

59

Joyalukkas

58

53

*Not available Source: Metals Focus; World Gold Council

There are signs that the shape of the market is changing. Between 2000 and 2015 we have seen the emergence of more organised participants, with their market share rising from 5% to 30%. By 2020, it is likely that this share will have risen to between 35% and 40%. This trend is concentrated in cities, supported by growing urbanisation and increasing awareness of branded jewellery among younger consumers. Regional chains have taken the lead in increasing market share, but some national retailers have also emerged (Table 6). For an example of the rise of organised retailers, please see Focus Box: The rise of Tanishq. But the unorganised sector remains the major force in jewellery retailing across India. Local standalone family jewellers continue to dominate rural centres, not least as they fulfil several roles, including in some instances acting as banker. This role aside, there is also a clear demarcation between the market segment catered for by standalone retailers and that catered for by regional and national chains (Table 7).

30%

Only of Indian jewellery retailers are national or regionally branded chains

Table 7: Size of retail shops, stocks and employees 53 Stand alone/ Independent retailers

Medium sized retailers

Organised Unorganised

Regional chains

National chains









Caters to the market where customers make purchases based on price  

This can include family retailers. The focus is on the traditional market

The focus is on local trends and designs. The differentiator is purity and trust

The focus is on brands and purity. Typically, these chains have high making charges.

Shop size in sq ft

150-500

300-1,000

500-3,000

4,000-25,000 

Inventory

5-20kgs

25-50kgs

30-150kgs

150-500kgs

Display in store (% of total stock)

40-50%

60%

80%

90%

4-5

10-15

20-35

40-60

Distinctive feature

Employees per store Source: Metals Focus; World Gold Council

49 This includes organised and unorganised retailers. 50 For more detail on the round table discussions, please see the methodology box. 51 Handbook of Statistics on the Indian Economy, RBI, 2015. 52 Company websites and investor presentations, correct as at April 2016. 53 Metals Focus.

India’s gold market: evolution and innovation

29

The growing importance of advertising As organised jewellers continue to grow and compete for business, they are embracing advertising to broaden their appeal. As explained in Chapter 2, while tradition and advice from friends and family are strong influencers on purchase behaviour, spontaneity and self-direction also play a role – some people buy a piece of jewellery simply because they see it and like it. Advertising can tap into that. Retailers view advertising campaigns as vital in targeting young, urban consumers. The evolution of retailers' advertising activity is interesting. In the past, more traditional means – such as print media – were used. Now, despite the cost, electronic as well as outdoor media are much more prevalent. On average, it can cost Rs9,000 per square centimetre to advertise in a leading Indian newspaper. By comparison, advertising on a national television channel during peak time may cost between Rs30,000 – Rs40,000 for a 10-second spot, and this can rise to Rs60,000 – Rs100,000 during major sporting events. Regional entertainment channels are cheaper, often by at least 30–50%.54 These often attract regional chains that prefer to advertise in local languages. The large organised retailers take marketing very seriously, allocating significant budgets. Television advertising spending by jewellers was consistently between Rs3400mn and Rs3700mn (US$56mn to US$58mn) during 2013–2015.55 To give a sense of individual company spend, top branded jewellery chain, Titan Company Limited, increased its advertising expenditure to Rs380mn (US$6mn) in 2015 from Rs240mn (US$4mn) in 2013. Similarly, Kalyan Jewellers spent Rs700mn (US$11mn) in 2015, up from Rs610mn (US$10mn) in 2013. Online market India has embraced online retailing. Flipkart, Snapdeal and Amazon are battling it out to gain market share in the broad consumer market. Some jewellery retailers have also ventured into this market place. At present retailers are largely focused on selling lighter pieces at lower price points online. Consumers have a strong preference to touch and feel larger or more intricate jewellery before purchasing – in our 2016 consumer research, 55% of consumers said they prefer to touch the product before buying it, and that was why they bought in-store rather than online.

Although online jewellery retailing is at present a very small part of the market, it is growing. Traditional retailers are showing increasing interest in entering this space. In May 2016, Titan Industries acquired a majority stake in CaratLane, a move that will allow the company to enhance its e-commerce capabilities significantly and help target younger customers. Those close to the market believe that in 10 years online sales could account for between 7% and 10% of total sales by value. Whether or not this happens is dependent on the consumer – their preferences will shape how the online jewellery market grows. While the growth of online jewellery sales may take several years, online, digital and social activity already plays an important part of the purchase journey. In urban India 40% of consumers said that they browsed online before purchasing their jewellery. And around a quarter of urban consumers said that they used online blogs and social media for ideas and inspiration. For millennials – those aged between 18–33 years old – the figure is closer to a third. Gold jewellery transactions: cash buying vs exchange Cash is the most common method of purchasing gold jewellery. It accounts for 70%–80% of all transactions.56 But consumers often exchange bars and coins for jewellery. Why? There are two drivers which can influence whether bars and coins, or older jewellery, is exchanged for new jewellery or bought for cash: the time of year and gold price trends. Although gold is bought throughout the year, as discussed in Chapter 2, there are certain months when purchases accelerate, such as festive or marriage seasons. This affects how people buy gold jewellery. For example, during Diwali, the ratio of cash buying is much higher. This is because harvests have been reaped and cash has flowed into households’ coffers, especially in rural areas. This is in contrast to the marriage season when exchange rises as consumers exchange bars and coins, which they have accumulated over many years, for bridal jewellery. The Indian consumer is very savvy when it comes to the gold price. During periods of high and rising prices, a consumer is more likely to exchange gold for new jewellery, saving cash to buy gold when prices are at levels they are more comfortable with.

54 All costs are 2015 averages. 55 Maxus India. 56 The remaining 20–30% of transactions are made by cheque, credit or debit card.

India’s gold market: evolution and innovation

30

Focus: The rise of Tanishq The early years India’s jewellery industry started to change in 1995 when Titan Industries,57 one of India’s leading watch manufacturers, launched its own jewellery brand, Tanishq. Its aim was to target a different type of jewellery consumer. Rather than focus on traditional 22-carat designs it developed a stylish portfolio of contemporary 18-carat jewellery and watches. Up until this point, the Indian jewellery market had been largely unorganised and fragmented, with few recognised brand names. Tanishq found trading challenging at the start. Domestic consumers did not readily accept a modern concept in what was such a traditional jewellery market. By contrast, exports performed well. Sales to key jewellery markets such as the UK, US, Australia and the Middle East flourished. Re-working its strategy for the home market Tanishq revised its strategy. With an initial emphasis on exports, its designs were predominantly Western oriented, but similar product lines were also offered at home. For many consumers, the designs were too contemporary. Given India’s diversity, Tanishq realised that it should cater to the tastes across the country. Its emphasis shifted from modern to more traditional design, including 22k and 24k ornaments inspired by designs from various states. It incorporated traditional styles into its more contemporary designs. The company also began seasonal and localised promotions based on Indian festivals, and embarked on an overhaul of its retail stores. The second step involved enhancing its brand and reputation by building trust. To do this it focused on purity. In 1999, Tanishq introduced the concept of Karatmeters in its retail boutiques. The Karatmeter used X-rays to provide an accurate reading, within three minutes, of the constitution of gold in an ornament. As part of its strategy, Tanishq also conducted tests on 10,000 ornaments selected at random. In many cases, the pieces were found

to be under carat. Over time, this focus on purity proved to be a key selling point for Tanishq. And to bolster trust further it decided to use a standard gold price across all its showrooms from March 2000. This emphasis on trust led to a sharp jump in sales and helped the firm expand. By 2001, Tanishq had nearly 50 stores located in metros and Tier 1 cities. Tanishq further built its market by highlighting its connection with Tata, a trusted brand in the Indian corporate world with businesses ranging from steel to airlines. Its marketing budget expanded to encompass national-level spending (both electronic and print media), regional budgets, direct mail and research. Second push for penetration Having built its brand and established itself as a leading jeweller, Tanishq started to branch out. In 2005 it explored the corporate gifts and vouchers market and began to provide financing for the purchase of gold jewellery. In 2007, the company started focusing on higher-end jewellery with the introduction of Zoya, a chain of luxury jewellery boutiques encompassing designer and international designs. It also expanded its geographic coverage. After establishing Tanishq among the large and growing middle class in urban centres, Titan Industries decided to venture into rural India. To do so, it launched Gold Plus, a brand aimed at semi-urban and rural locations. Tanishq and Gold Plus delivered approximately Rs87bn (US$1.29bn) of combined net sales in 2015. Tanishq has over 190 stores and Gold Plus has over 30 stores, with a combined retail space of more than 800,000 sq ft. Tanishq is now one of the largest retail jewellery chains in India, with an excellent reputation for its combination of traditional and contemporary designs.

57 Titan Industries is a subsidiary of Tata Group.

India’s gold market: evolution and innovation

31

Manufacturing market structure Jewellery manufacturing also highly fragmented, but this is changing Even though India is one of the foremost jewellery fabricators in the world, its manufacturing facilities are largely unorganised. Barely 5%–10%58 of units operate as organised, large-scale facilities – ten years ago these would have hardly existed. The vast majority of the industry is characterised by small workshops, each typically employing two to four goldsmiths. This is reflected in the fact that between 60% and 65% of jewellery manufactured in India is handmade. This figure was much higher a decade ago – the rise of manufactured jewellery has led to the drop in share of handmade jewellery. One of the key reasons that jewellery manufacturing remains largely unorganised is the relatively low capital requirements of small workshops. Rarely do they own the gold on which they work. Instead, they carry out what the industry calls job work for others.

Regions specialise in producing different types of jewellery Jewellery manufacturing in India is highly concentrated. Around 60%59 of the gems and jewellery industry is centred around Mumbai, Kolkata and New Delhi. The majority of jewellery manufactured in these locations is sold outside these cities, either nationally or internationally. As jewellery tastes and preferences differ across the country, so do manufacturing skills and expertise (Map page 33). Regions specialise in producing specific types of jewellery. Jaipur in Rajasthan has a world-class reputation for producing jewellery with semi precious stones and gems; Hyderabad has a tradition in pearls going back centuries, so much so that it is known as the City of Pearls; similarly, Surat in Gujarat is known as Diamond City.

60%–65%

of jewellery manufactured in India is handmade This is both a strength and a weakness. The artisan, bespoke nature of the handmade jewellery allows the karigars to produce beautiful, intricate pieces which are not possible with machine-made jewellery. But it also means the sector suffers from a lack of transparency. This makes it difficult for banks to lend and goes some way to explaining the lack of readily available capital, which would be required for a manufacturer to develop its workshop or factory and recruit more employees.

The majority of manufacturing facilities in India are small workshops of two to four employees.

Growth in organised manufacturing over recent years has owed much to the growth in exports and the requirements of the organised retail sector. International buyers, for example, have strict procurement policies which rule out many of the smaller workshops. Orders from overseas and domestic organised retailers are often large and manufacturers need to be of a certain size in order to fulfil them. Therefore, growth in the organised retail sector and in India’s jewellery exports – as outlined in Chapter 4 – has supported the development of the organised manufacturing sector.

58 Metals Focus. 59 Metals Focus, World Gold Council: an introduction to the Indian gold market.

India’s gold market: evolution and innovation

32

Major Jewellery manufacturing centres and hallmarking centres in India60 The map shows the number of BIS-approved hallmarking centres in each Indian state. Major jewellery manufacturing centres and hallmarking centres in India

king centres in India

Jammu and Kashmir

North

1

20%

Himachal Pradesh

3 Chandigarh

Punjab

Jaipur Kundan stones and semi precious

5

Rajasthan

22

58

58

58 58

58

58

58

58

58 58

58

58

58

58

58Meghalaya 58

Jharkhand Madhya Manipur Pradesh

28

Tripura

1

4

West Bengal

Assam

Daman and Diu

Gujarat Kolkata • Rajkot – coloured Handmade jewellery stones and gold jewellery • Surat – diamond polishing hub

22

Tripura

West Bengal

Mizoram

3

Odisha

36

Dadra and Nagar Haveli

Goa

Nagaland

1

Chhattisgarh

Mizoram

Mumbai • Machine made jewellery • Largest wholesale market

6

Kolkata Handmade jewellery

Telangana 2

Karnataka

Andhra Pradesh 26

26

South 40%

Hyderabad Semi-precious studded jewellery

South 40%

Coimbatore Casting jewellery

mbatore ting jewellery

Kerala

herry

58 58

Manipur

Meghalaya

Maharashtra

derabad mi-precious dded jewellery

58

58

3

Nagaland

hattisgarh

6

58

Bihar

Gujarat

Odisha

58

58

58

Uttar Pradesh

1

3

3

Arunachal Pradesh

Sikkim

13

Assam

25% Bihar

1

23

9

West

Jharkhand

15%

Delhi

Arunachal Pradesh

Sikkim

sh

1

Haryana

15%

East

Delhi/Agra Silver jewellery

Uttarakhand

7

East

Delhi/Agra Silver jewellery

1

38

Tamil Nadu

Puducherry

58

Andaman and Nicobar Islands

Lakshadweep Andaman and Nicobar Islands Thrissur Lightweight jewellery

Key % = Regional share of Indian jewellery demand. 60 BIS.

India’s gold market: evolution and innovation

58 = The number of BIS-approved hallmarking centres in each Indian state.

33

Hallmarking It is odd that there has been little consumer protection in a country with such a strong relationship with gold The Bureau of Indian Standards (BIS) is the national body of standards in India. In 2000, it launched a long-term scheme to encourage the voluntary hallmarking of gold jewellery. The objectives of the BIS certification of gold are to protect consumers, support the export of gold jewellery and to develop the country as a reliable gold centre. BIS has made huge strides in this area. Over 300 hallmarking centres61 have been rolled out across the country (Map page 33), 13,000 jewellers have been accredited, and a supervisory structure has been established for both hallmarkers and retailers. But more needs to be done. Despite 15 years of hallmarking, gold jewellery is still routinely under-carated. According to research by the consultancy, Oliver Wyman, under-carating of gold jewellery weight has fallen from between 20%–40% to somewhere around 10%–15%, although the true percentage may well be far higher given there are limited number of BIS certified jewellers.62 This is an important issue for the consumer. In urban India, 5% of consumers say they do not know the caratage of the jewellery they bought in the past 12 months; this increases to 18% in rural India. Furthermore, 86% of respondents in India said that hallmarking is extremely or very important. Tackling this issue is key to ensuring the health of the gold industry.

What needs to be done? In our report Developing Indian hallmarking, a roadmap for future growth, we advocate six short-term measures to improve the efficiency and effectiveness of hallmarking: • Strengthen governance around hallmarking processes • Drive customer awareness of hallmarking • Incentivise and facilitate expansion of hallmarking centres • Use BIS data to develop a ratings system for jewellers • Pilot Unique ID or other technology solutions to support hallmarking • Pursue membership of the International Hallmarking Convention, or develop an Asian alternative. Over the longer-term, we suggest: • Moving to a mandatory hallmarking regime • Placing the onus of hallmarking on manufacturers • Developing mechanisms to monitor the flow of gold across the supply chain. Mandatory hallmarking of jewellery with BIS Act, 2016 Recent developments herald further improvements, with the approval of a new BIS Act 2016. A detailed overview of the Bill is discussed in Chapter 10, but its primary aim is to make the hallmarking of gold jewellery mandatory and allow the government to enforce it. This could largely wipe out the malpractice of gold jewellery and ornaments of inferior purity being sold as 22-carat.

Consumer protection can be improved in the short and medium term More rigour in the hallmarking process would benefit India’s consumers and gold market. Trust in the industry would increase. This would benefit consumers, retailers and exporters.

Hallmarked bangle.

61 As of Jan 2017, there are 431 hallmarking centres. 62 World Gold Council, Developing Indian Hallmarking, a road map for future growth.

India’s gold market: evolution and innovation

34

The hallmarking process explained In accordance with BIS procedures, hallmarking is applied to all parts of the item that can be easily detached or replaced, except for bangles and light weight items where hallmarking is only applied once. A hallmark is made up of five different symbols which should be inscribed to illustrate the following: • BIS mark • Fineness • Assaying and Hallmarking Centre mark • Year of marking

Outlook Challenges… Despite its huge importance to the economy, the jewellery industry is one of the most heavily regulated industries in India. Take how difficult it has been to secure its raw material; gold. No other industry has had to endure rules as complex and market-distorting as the 80:20 rule. Encouragingly, the policy approach seem to be improving. In November 2014 the 80:20 rule was repealed. And in the 2015 Union Budget a policy framework – including the gold monetisation scheme and Indian gold coin – was established to support India’s gold industry.

• Jeweller’s mark.

Focushallmarks box: BIS hallmarking components BIS for gold jewellery consist of several components

916 The BIS logo

A three digit number (out of a set of six predefined values) indicating the purity of the gold in part-perthousand-format viz; 958, 916, 875, 750, 585, 375

India’s gold market: evolution and innovation

Logo of the assaying centre

J

ABC

A code denoting the year of hallmarking

Logo/code of the jeweller

35

But the industry still faces some challenges. For a start, small and medium sized manufacturers struggle to obtain gold loans to purchase material. This may change given the introduction of the government’s gold monetisation scheme, which may make it easier for manufacturers to obtain gold loans. More generally, smaller participants in the industry struggle to access credit. For FY2015–16, only Rs727bn was made available to the industry by the financial sector, accounting for just 2.7% of total bank credit.63 This is unlikely to change any time soon. The fragmented nature of the industry means that some parts lack transparency, which makes it hard for banks to complete the due diligence necessary to advance loans. The opacity also hides some shady practices. Stories of banks falling foul of devious jewellery firms who fraudulently obtain loans, and subsequently default, are rife. The gold jewellery industry also suffers from poor infrastructure, largely as a result of it being unorganised and dominated by small, independent retailers and manufacturers. Transport, vaulting, technology and training are weak by international standards. As the sector becomes more organised this will improve.

… and opportunities India’s gold jewellery industry is highly fragmented: 70% of retailers and 90%–95% of manufacturers are small, independent firms. But we have seen slow and steady progress in this area. Large regional and national retailers have taken a greater share of the retail market. They seem to have the momentum behind them. By 2020 their share could rise to 35%–40%. And as India’s jewellery export market grows, organised manufacturers should grow too.

By 2020, large regional and national retailers could have become

35%–40% of the market

India’s gold jewellery industry can look to other sectors, and indeed other countries, for inspiration. The Bharat Diamond Bourse (BDB) in Mumbai, which opened in 2001, supports industry sourcing, transportation and vaulting. In 2006 a complex in Istanbul, Turkey, called Kuyumcukent – Goldsmiths’ City – began making gold jewellery. Kuyumcukent is the world’s largest integrated goldsmith centre and houses around 2,500 production units and shops, as well as the Istanbul Gold Refinery. We see no reason why India’s gold industry cannot emulate either of these.

63 Industry-wide deployment of Gross Bank Credit from RBI, published on 10 May 2016.

India’s gold market: evolution and innovation

36

4: International jewellery trade India is one of the largest gold jewellery exporters in the world. In FY2015–2016, Indian gold jewellery shipments came to US$8.6bn, with around half delivered to India’s largest jewellery export destination, the UAE. The government has increasingly lent its support to the export industry over recent years, not least through the Special Economic Zones that have been set up around the country. Looking ahead, vocational opportunities in the gems and jewellery sector are set to grow noticeably, with local trade bodies targeting employment growth of 0.7mn–1.5mn by 2020, many of which will be in the import/export sector. Jewellery exports and imports The Indian gems and jewellery sector plays an important role in India’s export economy Gems and jewellery exports cover a range of product segments, namely: cut and polished diamonds, gold jewellery, gold medallions, rough diamonds, gemstones, pearls, synthetic stones and fashion jewellery (Chart 19). Cut and polished diamonds account for the lion’s share of exports, with gold taking second spot.

Chart 19: Gold accounted for over a third of gems and jewellery exports in FY15 –16 Exports value (in %)

C&P diamonds Gold jewellery Gold medallion Silver jewellery Rough diamonds Gemstones Others*

The gems and jewellery export industry makes a big contribution to the country’s finances. Since 2004, it has earned over US$369bn (Rs19,024bn) of foreign exchange. And this is likely to increase by a compound annual growth rate of 5%–7%64 over the next 10 years.65 It also makes a sizeable contribution to employment. According to a 2013 report by consultants, AT Kearney, commissioned by the Federation of Indian Chambers of Commerce and Industry, the gems and jewellery industry employs over 2.5 million people, and has the potential of adding a further 0.7–1.5 million by 2020.66

52% 22% 14% 8% 3% 1% 1%

*Others includes pearls, synthetic stones, fashion jewellery and sales to foreign tourists. 38% Source: The Gems and Jewellery Export Promotion Council; World Gold Council

64 Metals Focus. 65 GJEPC. 66 AT Kearney, Federation of Indian Chambers of Commerce and Industry, All that glitters is gold.

India’s gold market: evolution and innovation

37

Exports Gold jewellery exports from India

50%

30%

20%

Plain gold jewellery

Diamond jewellery

Precious and semiprecious gem jewellery

Exporting around the world

Exporting to expatriates

In 2015-16, gold jewellery was exported to nearly 90 countries and regions, including:

India largely exports to countries with sizeable Indian populations, with

50% of exports going to the UAE

UK USA UAE Hong Kong Singapore

The 80:20 rule

$

Value of exports

The value of exports was

$8.6bn

in 2015-16, still some way off the 2012-13 peak of

$13bn

India’s gold market: evolution and innovation

The rule required importers of refined gold to export

20% of their imports as gold jewellery, which led

to a slump in imports and was disruptive to the market

38

India is one of the largest jewellery exporters in the world Indian jewellery exports have grown over the past decade to reach 160 countries. In FY2004–05, India exported gems and jewellery worth a total of US$15.6bn(Rs.618.3bn). This almost trebled over the following six years, peaking at US$43.2bn (Rs2,048.2bn) in FY2011–12. Exports dropped to around US$39.1bn in FY2012–13 due to sluggish demand from Western markets, for diamond jewellery in particular, but has been relatively stable since (Chart 20). Plain jewellery accounts for the lion’s share of gold jewellery exports In FY2015 –16, gold jewellery was exported to nearly 90 countries and regions, including Hong Kong, the US, the UK and Singapore, although the UAE accounted for around 50% of the total. The value of exports was US$8.6bn in FY2015–16, still some way off the 2012–13 total of US$13 bn.

Around 50% of gold jewellery exports are plain gold jewellery sets or chains. These are typically made in Mumbai, Kolkata and cities across southern India, and shipped to the UAE, Hong Kong and Singapore. Around 30% of gold jewellery exports are in the form of diamond jewellery manufactured in Mumbai and flown to the US, UAE and Hong Kong. Precious and semi-precious gem jewellery make up the remaining 20%, predominantly manufactured in west Indian states such as Rajasthan and Gujarat and exported to the UAE and UK. India largely exports to countries with sizeable Indian populations, such as the UAE, US, UK and Hong Kong. Indian gold jewellery imports are small Gold jewellery imports are modest compared to jewellery exports (Chart 21). Most of the jewellery imported is high-end (either branded or non-branded) or machinemade, especially chains. Machine-made jewellery usually comes from the Middle East or South East Asia. Virtually no jewellery imports are handmade; this is India’s area of expertise.

Chart 20: Gems and jewellery exports doubled in ten years

Chart 21: Indian gold jewellery exports dwarf gold jewellery imports

US$ bn 50

US$ bn 14

45

12

40 10

35 30

8

India exports jewellery to over 160 countries

25

6

20 15

4

10 2

5

Source: The Gem and Jewellery Export Promotion Council; World Gold Council

India’s gold market: evolution and innovation

6 20 1

01 5 20

15 -

01 4 20 1

42

01 3 20 1

32

01 2

22

12

20 1

20 1

0

Gold jewellery exports

01 1

20 1

02

09 -

20

20 1

8

00 9

08 -2

20

7

20 0

07 -

20 0 20

20

06 -

20 0

5 20

04 20

05 -

20 0

(p ) 6

01 5 20

15 -

20 1

01 4 20

13

-2

01 3

20

14 -2

01 2 20

12 -2

01 1 20

11 -2

01 0 20

10 -2

00 9 20

09 -2

00 8 20

08 -2

00 7 20

07 -2

00 6 20

06 -2

00 5

05 -2

20

04 -2 20

Note: p = provisonal data.

6

0

0

Gold jewellery imports

Source: GJEPC; World Gold Council

39

Developing India’s jewellery exports Gems and Jewellery Export Promotion Council’s role in developing the market The Gems and Jewellery Export Promotion Council (GJEPC) was set up by the Ministry of Commerce in 1966 to boost the country’s jewellery exports and help it gain prominence in international markets. The GJEPC is headquartered in Mumbai, with regional offices in Delhi, Kolkata, Chennai, Surat and Jaipur, and today represents more than 6,000 exporters. Gold jewellery exporters form the largest contingent of GJEPC membership, closely followed by diamond exporters (Chart 22). GJEPC activities involve industry promotion through local as well as international trade shows, most notably the India International Jewellery Show (IIJS) and Vicenzaoro Dubai. As a pivotal body of the Indian gems and jewellery export sector, the GJEPC liaises with the government, providing industry representation. It is also involved in industry initiatives, including training, developing industry benchmarks and conducting research.

Chart 22: Membership of GJEPC by business segment (%)

Special Economic Zones (SEZ) initiative to boost jewellery trade India introduced the SEZ policy in April 2000 as an initiative designed to boost trade. The government allowed companies to set up units in SEZ to manufacture goods and provide services that help facilitate exports. The SEZ Act 2005 laid the regulatory framework for setting up and running SEZs. This was largely carried out to promote manufacturing and subcontracting of jewellery. Under the Act, these units enjoy a tax holiday of 15 years, and are exempt from customs duties and central excise duties on capital goods and raw material as well as consumables. The Santacruz Electronics Export Processing Zone (SEEPZ) is one of the largest export zones in India. Many leading jewellery manufacturers are based there as it is one of the few SEZs to export not only gold jewellery but also silver and diamonds. Gold jewellery accounts for by far the largest share: 84% (US$1.8bn) of all jewellery exports from the zone are gold.

Table 8: Operational or approved SEZ in India67 Name of SEZ

Location

State

Mumbai

Maharashtra

Gitanjali Gems Ltd

Panvel

Maharashtra

Navi Mumbai SEZ

Navi Mumbai

Maharashtra

Gitanjali Gems Ltd

Nanded

Maharashtra

Gitanjali Gems Ltd

Aurangabad

Maharashtra

Santacruz Electronics Export Processing Zone (SEEPZ) Gold jewellery 38% Diamonds 37% Coloured gemstones 13% Other precious metals 7% Pearls 1% Synthetic stones 1% Fashion jewellery 1% Others* 2%

*Others include Sales to foreign tourists and Not indicated. Source: GJEPC

38%

Gujarat Hira Bourse

Surat

Gujarat

Sitapura SEZ

Jaipur

Rajasthan

MP Audyogik Kendra Vikas Nigam Ltd

Indore

Madhya Pradesh

Chattisgarh Infrastructure Ltd

Raipur

Chattisgarh

Delhi State Industrial Information Development Corporation

Delhi

Delhi

Planetview Mercantile Company

Verna

Goa

Manikanchan SEZ Hyderabad Gems SEZ Goldsouk International Gems and Jewellery SEZ

Kolkata

West Bengal

Hyderabad

Telangana

Gurugram

Haryana

Source: Metals Focus; World Gold Council

67 Ministry of Commerce and Industry.

India’s gold market: evolution and innovation

40

Round tripping In promoting gold exports the Indian government faces a challenge: to finely balance the interests of the domestic manufacturing sector with the need to control round tripping. Round tripping is the act of exporting gold, be it jewellery, bars or coins, with the sole purpose of melting it down before re-importing it back to the original exporting country. The process results in a circular flow of gold between different countries, serving to inflate trade statistics. The levels involved can be significant and this is one reason why trade statistics should not be taken at face value (Chart 23).

The underlying motive behind round tripping varies. It can be to arbitrage between differences in tax rates or exploit loopholes. Or it can be to exploit differences in interest rates or exchange rates. In the case of India, round tripping is commonly used so firms can artificially boost their trading volumes in order to secure less expensive finance. Round tripping has been a long-standing feature of the Indian market and is largely visible in the jewellery trade with the UAE, Hong Kong and Singapore. This can involve crude jewellery, which is close enough in form to be exported as jewellery, but crude enough so that making charges are negligible. After it arrives at its destination it is promptly melted down and shipped back to India in the form of bars, through official or unofficial channels.

Chart 23: Estimated levels of round tripping, 2010-2015 Tonnes 140 120 100 80 60 40 20 0

2010

2011

2012

2013

2014

2015

Source: Metals Focus

Round tripping Gold is exported from India, often in the form of crude jewellery

At the destination, the gold is melted down into bars ...which are then exported back to India

Round tripping is used by firms to boost trading volumes and secure cheaper finance; one reason why trade statistics should not be taken at face value. India’s gold market: evolution and innovation

41

Value addition norms are employed to control round tripping A measure often employed by the government to control round tripping is the use of value addition norms. Value addition is defined as the difference in value between the raw material input and the final output – i.e. the difference in value between a finished piece of jewellery and the raw materials used to manufacture it. Government-imposed norms (decided by the Ministry of Commerce and Industry) place a minimum level of value that the jeweller must add, thus making round tripping less profitable. The government faces a balancing act in setting value addition norms at an appropriate level. If they are too high, round tripping is discouraged but jewellery exporters find it difficult to sell jewellery at competitive prices. Set them too low, and exports become more competitive but round tripping becomes much more attractive. The authorities are very mindful of round tripping. The size of these flows, as shown in Chart 23 on the previous page, contributed to the decision to end the “80:20” system (details in Chapter 10). The increase in value addition norms announced as part of the new 2015–2020 foreign trade policy were also designed to curb this activity. In particular, the focus for deterring round tripping is squarely on items such as medallions and machinemade jewellery. These low mark-up items are not labourintensive to produce and can be easily recycled at the point of destination. Although value addition norms on medallions were maintained at 1.5% under the new policy, the minimum value addition requirement for machine made jewellery was increased from 1.5% to 2%. The government needs to closely monitor these levels to avoid the unintended consequence of adversely impacting genuine gold jewellery exports.

Outlook India’s jewellery exports have thrived over the past 10 years. Exports have been on an upward trajectory; bumpy, but upward nonetheless. The industry has made significant contributions to India’s foreign exchange earnings. This sector has the potential to grow. India’s expertise in handmade jewellery gives it a unique opportunity. The intricate designs produced by its karigars – expert craftsmen – give it an edge over much of the global competition. If managed correctly, we believe exports could increase to US$40bn by 2020. This is an ambitious target, but one that could be achieved if industry bodies and government work together to formulate supportive policies. Innovation, creativity, new ways of marketing and transparency in gold jewellery will be key to achieving this vision. The creation of jewellery parks, along with common facility centres with a focus on the revival of existing manufacturing centres, would be a positive step. A more active marketing strategy for Indian handcrafted jewellery would boost jewellery exports. This could be supported by Gold Heritage Tourism,68 which could become a key driver of India’s socio-economic progress by creating interest and demand for India’s heritage arts and crafts, by providing employment opportunities and by ensuring that the skills of millions of artists and artisans around the country are preserved, encouraged and stay relevant in the modern world.

68 Ministry of Commerce and Industry.

India’s gold market: evolution and innovation

42

5: Gold investment market India is one of the world’s largest bar and coin investment markets. At a macro level, income and inflation are key drivers of demand. But how consumers perceive gold also plays an important role. Our consumer research reveals that, for many investors, bars and coins are considered a safe investment and rank alongside deposit accounts as a preferred savings vehicle. Bar and coin demand may, however, face growing competition. Some view the government’s plans to improve banking penetration, especially in rural areas, as a threat. Bar and coin demand A large and growing market Over the past 25 years, bars and coins have accounted for just over one fifth of total Indian consumer demand for gold. This statistic, however, masks how the market has evolved. In 1995, bar and coin demand was less than 100t, accounting for 18% of total consumer demand. In 2015, it was 195t and 22% of India’s total consumer demand. India now ranks alongside Europe and China as one of the world’s largest bar and coin markets (Chart 24).

Economic drivers of gold investment demand Some of the factors supporting bar and coin demand are similar to those that have supported jewellery demand. Weddings and religious events, such as Diwali, are important. There are economic factors, too. As we discussed in our analysis of consumer demand in Chapter 2, these can be broken down into long- and short-run factors.

Chart 24: India is one the world's largest bar and coin markets Tonnes 300

Indian bar and coin demand has gone from less than 100t in 1995 to almost 200t in 2015

250

200

150

100

50

0 India 2015

Europe

China

Middle East

US

10 year average

Source: GFMS, Thomson Reuters; Metals Focus; World Gold Council

India’s gold market: evolution and innovation

43

Over the long term, investment demand is determined by income. All else being equal, for a 1% increase in gross national income per capita, bar and coin demand rises 1.1%. Rising incomes have allowed households to save more and households’ allocation to financial assets (including bank deposits, insurance funds and mutual funds) and physical savings (real estate and gold) has increased (Chart 25).69

The short term factors driving bar and coin demand are similar to those for jewellery: inflation, monsoon rainfall and import barriers. Our econometric work shows that, holding everything else constant: • a 1% increase in inflation boosts demand by 4.4% • a 1% fall in the gold price increases bar and coin demand by 0.9% • a 1% increase in excess rainfall boosts demand by 0.8%

Interestingly, price does not emerge as a factor influencing bar and coin demand over the long term. A possible explanation could be that the role of price is overpowered by other, more significant factors. Indian families often make regular purchases of bars and coins in order to accumulate gold, often to be converted into jewellery at a later date, which may make it relatively resistant to changes in the price. The trend of urbanisation may also have played its part, as city dwellers have a greater inclination to purchase bars and coins than those in rural India. Both these points are explained below.

• the import duties and other restrictive measures reduced demand by 4.5% during the period in which they were in place.70 Bar and coin demand is generally more responsive to these short-term factors than jewellery demand.

Chart 25: Rising incomes have allowed households to save more Rupees bn 25,000

Physical investment in, for example, real estate and gold, is preferred to financial investments

20,000

15,000

10,000

5,000

E 20 14

-1

5

3 -1 20 12

11 020 1

09 820 0

07 620 0

05 420 0

3 20 20 0

1 00

19 9

Physical savings

20 0

9 89

7 -9

94 19

Financial savings

19 96

95

93 92 19

19

90 -

91

0

Total household savings

Source: Reserve Bank of India

69 The steady increase in physical savings dipped from 2013–14. FY2014–15 saw household savings shift from physical assets towards financial savings in response to a cooling in property prices as banks trimmed lending to developers in the real estate market. The shift is also reflective of the headwinds faced by gold in 2014, with restrictions on the import and sale of gold coins, and the decline in gold price over this period. 70 Coin imports were banned on 15 August 2013. Banks and nominated agencies were prohibited to import coins and medallions. The ban was lifted on 18 February, 2015.

India’s gold market: evolution and innovation

44

Bars and coins increased their share of consumer demand Other factors mean that the share of consumer demand allocated to bars and coins has grown. One such factor is the role of bars and coins in helping families accumulate gold for future weddings. Small denomination bars and coins allow households to gradually build up their gold investment to be exchanged for gold jewellery as an important occasion approaches. This is known as a Systematic Investment Plan in gold (SIPs). Some consumers invest in SIPs run by jewellers, whereas others start their own SIP. The popularity of SIPs grew as the gold price increased between 2000 and 2012. Urbanisation has played a role too. Proprietary consumer research conducted in 2016 indicated that consumers in urban India are more inclined to invest in bars and coins than those in lower-tier cities and rural areas, who have a greater preference for gold jewellery (Chart 26). Allied to this, between 2001 and 2011, India’s share of urban population rose from 28% to 31% and the number of cities with more than one million inhabitants grew from 35 to 53.71

Gold coin shopping.

These two factors – SIPs and urbanisation – may explain why bar and coin demand is less responsive to price than jewellery.

Chart 26: Rural India mainly invests in gold via jewellery % 50 45 40 35 30 25 20 15 10 5 0 Total Gold bars/coins

Urban

Rural

Fine gold jewellery at least 22k

Sources: TNS; World Gold Council Question: Which of the following types of investments do you currently have? Sample size: 2,055 – 1,000 urban India and 1,055 rural India.

71 Census 2011.

India’s gold market: evolution and innovation

45

Understanding investor motives

Gold investment retailing

The data clearly demonstrates the importance of gold, especially bars and coins, in meeting individual investment needs. But what exactly are those needs? Why do people invest in bars and coins? The econometric analysis of the drivers of gold demand only tells part of the story. Investors do not slavishly follow inflation rates and gross national income per capita before making investment decisions. Other factors play a role too.

Jewellers are the preferred point of purchase The majority of bar and coin sales take place at jewellery stores. This preference for buying investment products from jewellery retailers is due not only to the sheer geographic coverage of these stores, but also to the jeweller’s expertise and the degree of trust consumers place in them. In the ICE360º survey conducted in 2014, 93% of respondents said jewellery shops were their preferred point to buy bars and coins.

One factor is that gold is viewed as a safe asset. Many Indians make a distinction between safe and risky assets, and gold is viewed as safe. When asked about their current investments in our 2016 consumer research, investors ranked gold just behind savings accounts and insurance products (Chart 27). And when asked why they invested in gold jewellery and bars and coins, the most common responses were: ‘to protect my wealth’ and ‘to make good returns in the long term’. Of those surveyed, 73% of respondents agree with the statement that ‘owning gold makes me feel secure for the long term’.

The bar and coin retailing landscape is changing, albeit slowly. Some refineries, such as MMTC-PAMP and the Bangalore Refinery, have started selling direct to the consumer through their distribution channels and representatives. Online retailing has also increased. Both Flipkart and Snapdeal, two of India’s largest online retailer platforms, have entered this space and the recently launched Indian Gold Coin (discussed in more detail in Chapter 10) is sold through banks. This may help to raise the profile of banks in the minds of consumers when they buy gold, especially in rural India.

Chart 27: Gold features prominently in people's investments % 80 70 60 50 40 30 20 10 0 Savings account

Insurance

Fine gold jewellery

Gold bars/ coins

Stocks and shares

Real estate

Gold financial products

Collective investment plan

Government bonds

Corporate bonds

Collectibles

Source: TNS; World Gold Council Question: Which of the following types of investments do you currently have? Sample size: 2,055 – 1,000 urban India and 1,055 rural India.

India’s gold market: evolution and innovation

46

Gold bars favoured for investment, coins for gifting Investors prefer bars to coins, with bar demand consistently recorded at several multiples of coin purchases (Table 9). Popular bar sizes include the 8g Guinea or 10g and 50g, each of which is bought for investment purposes (and commonly used for the purpose of converting into jewellery at a later date). Smaller weights, by contrast, are used for gifting purposes. The most popular coin denominations are 5g, 8g, 10g and 20g, although higher denominations, including 50g and 100g, resonate with wealthier retail investors. Denominations of coins less than 10g, however, account for some 60% of the market. Coins are especially popular during the festive season, notably at Diwali or on the auspicious day of Akshaya Trithiya, so much so that 30–40% of annual coin sales take place during these times. Coins with the inscription of gods and goddesses sell well, particularly those with the goddess Lakshmi and elephant headed god Ganesha. Coins are also used for gifting purposes and for special occasions such as marriages and the birth of a child. The newly minted Indian gold coin may change the market It seems strange that up until recently, India, one of the world’s largest bar and coin markets, did not have its own national coin. The launch of the Indian Gold Coin means it now keeps company with countries such as South Africa, the US, Canada and China. In February 2015, Finance Minister Arun Jaitley unveiled plans for the official coin, in hallmarked, 24-carat gold, carrying the image of the Ashoka Chakra on one side and Mahatma Gandhi on the other. This project dovetails with Prime Minister Modi’s Make in India campaign and, in a country rife with under-carating, will be a coin in which investors can have confidence. If supported by the right marketing strategy, this could be a further fillip for the coin market.72 Table 9: Indian physical demand 2010–2015 (tonnes) 73

Increasing banking penetration – a competitive threat? India’s low penetration of traditional financial products, especially in rural communities, is an oft-cited threat to gold consumption. Households turn to gold because they do not have access to other banking and savings products, or so the argument goes. Some suggest this affects not just bars and coins, but also the element of jewellery purchases which double up as investment. As banking penetration increases and households have access to more savings products, gold may play less of a role. It is true that banking penetration is low. According to the government’s 2011 Census, just 59% of households had access to banking services.74 This figure was lower in rural India (Table 10). But banking penetration has been steadily increasing over the past 15 years. In 2001, banking penetration stood at 36% overall, but only 30% of rural households had access to banking. The ten years from 2001 to 2011 saw tremendous banking growth: an additional 76mn households gained access to banking services. Up to date data is limited, but the World Bank Gallup Global Findex Survey 2014 indicated that since 2011 bank account penetration continued apace.75 And what happened to gold demand over this period? It grew from around 705t to 974t, or in value terms, from Rs289.8bn to Rs2,300bn (US$6.14bn to US$49.23bn). Bar and coin demand went from 107t to a record 355t in 2011, and was 195t in 2015. Jewellery demand remained steady, hovering around 600t. So while the expansion of India’s banking network may be a competitive threat to an element of investment-related purchases of gold, it would seem that gold is not in immediate danger. This no doubt partly reflects the different, non-economic motives for buying gold – banking is not a substitute for gold as it cannot effectively meet the variety of needs that gold fulfils for Indian consumers. Jan Dhan Yojana accounts have increased banking penetration in households to near 100% in 2014–2015.

Year

Bars

Coins

2010

238.1

102

2011

248.4

106.3

2012

227.3

91.7

Rural households

30%

54%

2013

243.9

98.8

Urban households

50%

68%

2014

144.4

62.4

Total households

36%

59%

2015

135.6

59.0 

Table 10: Households with access to banking services (%) 2001

2011

Source: Census 2011; World Gold Council

Source: Metals Focus; World Gold Council

72 Unlike the US Eagle and Canadian Maple Leaf, the Indian Gold Coin is not a legal tender. 73 Metals Focus, Gold Focus 2015. 74 Department of Financial Services. 75 World Bank Gallup Findex Survey 2014.

India’s gold market: evolution and innovation

47

Indian gold-backed exchange traded funds – a small market with an uncertain future In a country where gold is so revered, it is not surprising to see exchange traded funds (ETFs) receive less attention than more tangible bars and coins.76 Coupled with that, despite growing over recent years, India’s banking and financial services penetration remains weak. Only 68% of urban households have bank accounts. And it is likely that many of those with access to banking only use basic services, such as current and deposit accounts. Few will have ventured into the broader world of ETFs.

Despite this slow start, ETF providers should not lose hope. Our consumer research reveals that those that do invest in ETFs are typically earning regular salaries and are highly educated. They are tech savvy and live in major urban centres. As the longer term macroeconomic and demographic trends – of an expanding middle class and rural-to-urban migration – continue, the retail market for ETFs may grow.

The domestic ETF market is still in its relatively early stages. The first – and currently largest – gold-backed ETF was launched by Benchmark in 2007.77 Since then other banks and financial service providers have followed Benchmark’s lead. At the end of June 2016, there were 13 ETFs in the county, with only 23.4t – or almost Rs66.5bn (US$1.2bn) – under management (Chart 28).

Chart 28: Indian gold-backed ETF holdings remain modest Tonnes 50 45 40 35 30 25 20 15 10 5 0 2007

2008

2009

2010

Goldman Sachs Gold Exchange Traded Scheme SBI-ETF Gold Kotak Gold ETF

2011

2012

2013

2014

2015

2016

R*Shares Gold Exchange Traded Fund HDFC Gold Exchange Traded Fund Other

Source: Bloomberg; Respective ETP providers; World Gold Council

76 These vehicles are open-ended funds that trade on a stock exchange in a similar fashion to shares of an individual company. In terms of gold, these funds closely track the price of physical gold; the minimum investment is just one gram. The Indian ETFs that we track are backed by physical gold, although some may allow for a small (maximum 10%) allocation to cash. 77 Benchmark Mutual Fund has since been taken over by Goldman Sachs and renamed ‘Goldman Sachs Gold Exchange Traded Scheme.’

India’s gold market: evolution and innovation

48

Focus: India’s commodity exchanges Although commodity exchanges have a long history in India, it is only recently that they have started to grow The first commodity exchange in India – the Bombay Cotton Trade Association – was launched in 1875, but the market’s development was stifled by heavy government intervention in the agricultural sector, following independence in 1947. It is only recently that forwards and futures trading have been selectively introduced, along with stringent regulatory controls. The Indian commodities futures market landscape is divided between national exchanges, such as MCX and NCDEX, and regional exchanges, including the Indian Pepper and Spice Trade Association (in Kochi) and the Rajkot Commodity Exchange. National exchanges have a greater market share of the total futures volume. Overall, more than 40 commodities are traded on nationwide exchanges. Gold comfortably accounts for the largest market share (Chart 29). During the latter part of the last decade, more than 26 commodity exchanges were operating across India. More recently, tighter regulations have stifled trading. Know-Your-Customer requirements, position limits, the imposition of taxes (such as the 0.1% Commodity Transaction Tax (CTT) on non-agricultural commodities introduced in 2013) and the National Spot Exchange scam,78 have seen some exchanges close. In 2015 there were just four national exchanges and 18 regional exchanges in

India.79 MCX is India’s largest commodity exchange, with a market share of more than 80%. Along with the NCDEX, it is one of the leading gold futures exchanges. Tax burden undermined gold futures trading but opportunities exist for growth Gold futures trading in India peaked in 2012 when it reached Rs37.5tn, but trading activity fell sharply following the introduction of the CTT in 2013 (Chart 30). As with many well meaning government regulations, the CTT has had unintended consequences, with some traders shifting towards unofficial trading channels, often referred to as dabba trading. Here, traders pay brokerage fees, but avoid taxes and regulatory oversight. But the future looks promising for Indian commodity exchanges. Despite rapid growth in trading volumes in the past, the penetration of Indian commodity exchanges remains fairly low. This affords a tremendous opportunity for the exchanges to grow. The majority of trading volumes generated on exchanges are from individual investors and traders. Banks, financial institutions and foreign investors are not allowed to participate in the market. If this were to change, trading volumes could flourish. Chart 30: Gold trading value across exchanges has declined in recent years Trillion Rs 50 45

Chart 29: Gold takes the largest share of exchange trading

40 35 30

Bullion Base metals Agricultural commodities Energy

43% 17% 16% 24%

25 20 15 10 5 0 2011-12

*Trading value in Rs crore, FY 2013-14.

2012-13

2013-14

2014-15

Source: Forwards Market Commission Annual Report 2015

Source: Forward Markets Commision

78 In July 2013, the National Spot Exchange limited – a recognised commodity exchange – defaulted on its obligations to its members, totalling Rs56bn. Nearly 13,000 investors were affected, but the impact was more far-reaching. A scandal of this magnitude shook the confidence of investors and the participation of retail investors on domestic commodity exchanges dropped sharply. 79 Forwards Market Commission Annual Report 2015.

India’s gold market: evolution and innovation

49

Outlook It is likely that bar and coin investment will remain strong and maintain – if not increase – its share of consumer demand. The slow but steady shift of people from rural to urban areas, coupled with the expanding middle class, underpins this expectation. Gold investment demand is also strengthened by latent demand 80 (Chart 31). Analysis undertaken by TNS reveals that ideally – in the absence of any barriers – Indian consumers would invest more in bars and coins, jewellery, and other gold-backed financial products than they do at the moment. This is not to say that all of this latent demand can be converted into sales. There are barriers to purchase around price perception and access via online retailing platforms, for example. But if the industry tackles these challenges, thinks innovatively of how to communicate with consumers and develops more seamless purchase journeys, it can certainly convert some of this latent demand into sales.

The optimistic outlook for bar and coin demand is not without risk. Gold’s accessibility through the nationwide network of jewellers, in both urban and rural areas, is one of its strengths. Some argue that the corollary is that gold demand is supported by low banking penetration. As banks become more accessible – which, through Pradhan Mantri Jan Dhan Yojna (loosely translated as banking for all), is one of PM Narendra Modi’s strategic goals – gold may face more competition.81 But despite the accessibility of bank accounts increasing over the past 15 years, bar and coin demand has continued to grow. Banking is not a perfect substitute for gold demand and while the expansion of India’s banking network may be a competitive threat to an element of gold demand, it would seem that this is not an immediate danger and is unlikely to seriously dent gold demand. By 2020, we expect bar and coin demand to be between 250–300t. India’s rising incomes and steady saving rates should support investment across a range of assets, including gold. We see the growth in urban dwellers as supporting this demand and the newly launched Indian Gold Coin as providing a welcome boost to the sector.

Chart 31: There is strong latent demand for gold investments

26 Rural

+5% 31

+8%

23 Urban

31

+6%

25

Total

31

0

5 Share of investment

10 Share of mind

15

20

25

30

35 %

Latent demand

Source: TNS; World Gold Council

80 This is calculated by comparing gold’s “share of mind” to consumers’ actual purchases over the past 12 months. Share of mind is based on pure attitudinal preference: what share of their investable income consumers invest in each option in the absence of any barrier. This is then compared to what they actually invested in. 81 Between the launch of the scheme in August 2014 and May 2016, around 218mn new accounts had been opened with Rs376bn of deposits.

India’s gold market: evolution and innovation

50

Latent demand

6: Gold in the financial system At over US$800bn,82 India’s private stock of gold is a significant resource. In the late 1990s, the Government tried and failed to draw some of this gold into the financial system. The latest monetisation scheme proposal, however, could be successful. Lowering the minimum deposit size from 500g to 30g is a significant step forward and more households use banks now than they did in the late 1990s. But only a modest amount has been monetised and more still needs to be done. In contrast, the gold loan market has flourished. In total, around 1,250t is used as collateral, largely with informal lenders, such as pawnbrokers. Since 2008, however, the formal sector has developed, and banks and gold loan companies have grabbed a share of the gold loans market. Gold monetisation India’s gold stock – bigger than Apple India has a huge stock of gold; some 23,000–24,000t in total, the majority of which is with households. And it is incredibly valuable. Based on the 2015 average price it was worth US$800bn. To put this in context, Apple’s market capitalisation at the same time was around US$600bn; two of India’s largest listed companies, Reliance Industries and Tata Consultancy Services, were quoted at around US$50bn each. In the late 1990s, the Government tried to capitalise on this gold – to draw it out from households and into the financial system – with the launch of the Gold Deposit Scheme (GDS). This allowed individuals to deposit gold at banks in return for interest. In addition, the scheme was exempt from capital gains, wealth and income tax. But it did not work. Between 1999 and 2015 only around 15t was mobilised. The big stumbling block was the minimum deposit, which at 500g, prevented many individuals and households from accessing the scheme. Gold monetisation v2.0 In the 2015 Union Budget, Finance Minister Arun Jaitley announced plans for a new, updated monetisation scheme, the structure of which is covered in detail in Chapter 10.

This scheme could be more successful, not least because the minimum deposit size has been reduced to 30g, which opens the scheme up to large swathes of the population. In addition, there are more bank branches in India and more households using banking services than there were in 1999 when the GDS was launched. This should make the marketing and distribution of gold monetisation services easier for banks. For the scheme to be a success, however, some hurdles still need to be overcome. These include: • Trust: It is vital that consumers, banks and jewellers have trust in the quality of gold flowing around the monetisation ecosystem • Ease of use: transactions must be simple. If they are not, it is unlikely savers will deposit their gold at banks • Incentives: each market participant – from the depositor to the bank to the refiner – must be incentivised to use and develop the scheme • Infrastructure: it will take time for refineries, assayers and banks to develop the infrastructure, processes and products to meet customers’ needs. If the mechanics of the scheme take these issues into account, the chances of it being a success are increased. If any one of these is not considered, the scheme may struggle.

82 Approximate value as at end 2015.

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Gold loans Growth of the gold loan industry While the original GDS may not have been a success, the gold loans market has boomed. Because of the emotional connection with gold, people rarely sell. If they need funds, most would rather pledge it as collateral and secure a gold loan. This is a big market. It is likely that around 1,250t of gold is pledged across the gold loan industry in India. There are two types of gold loan providers: formal (banks and non-bank financial companies) and informal (money lenders and pawnbrokers). Pledging gold as collateral has been an ever-present feature of India’s gold market. For generations, farming communities and rural households have used gold as a means of financing, often pledging it as collateral to raise funds to plant the following year’s crops. This lending has mostly been informal; even now, although there is no hard data available, the informal sector probably accounts for around 60–70% of the market. The government, however, was uneasy with rural communities being in debt to pawnbrokers and money lenders, as well as being concerned about the extortionate rates charged. In 2008, government agencies looked to steer households away from the informal sector towards the formal sector, including banks and non-bank financial companies (NBFCs). Their efforts have met with some success. For example, designating agricultural bank loans as ‘priority sector’ lending has supported the growth in formal gold loans for such purposes.83 Consequently, the State Bank of India now plays an important role in providing gold loans in rural India.

But this growth has not been without challenges. After a period of rapid expansion, the gold loan sector suffered a setback during FY2013–14 as the market witnessed several corporate failures. This led to fundamental changes across the gold loan industry. In particular, a loan to value (LTV) cap of 60% was applied to gold loans offered by NBFCs. Gold prices also started to fall during this period, which led to a significant decline in the level of activity of NBFCs. NBFCs lost significant market share to commercial banks (which did not have an LTV cap), as well as to the unorganised sector. The trend was reversed to some extent in 2015, when the LTV cap was revised to 75%, levelling the playing field between NBFCs and banks. During this phase, the gold loan NBFCs (Muthoot, Muthoot FinCorp, and Manappuram) focused on consolidating and stabilising their operations, while the new NBFC entrants (Shriram City Union Finance, Magma FinCorp, Capital First) reduced their exposure to the segment. For now, the era of regulatory uncertainty appears to have passed and the gold loan NBFCs have been able to lay the foundations for healthy growth over the coming few years. Gold loan companies: drivers of growth In the formal sector gold loans are provided by public and private sector banks, Co operatives and gold loan companies (NBFCs). While public banks have taken the lead, the NBFCs have gained a sizeable share, capturing almost 40% of the market in FY2014–15 (Chart 32). Chart 32: Share of organised market in gold loan against jewellery in FY2014-15 (%)

In recent years, gold loans have become popular in the cities as well as the rural areas. A key reason for this is that gold loan rates compare favourably with those available on personal loans.

NBFCs 36% Private sector banks 15% Public sector banks 44% Co operatives 5%

These factors have supported the growth of the industry. According to an RBI working group report,84 the gold loan market was worth about Rs1.2tn in 2011 (US$25.5bn), a six-fold rise in less than five years.85

Source: Manappuram Finance; World Gold Council 38%

83 Priority sector refers to those sectors of the economy that may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, low income people for housing, students for education and other low income groups and weaker sections. 84 Report of the Working Group to Study the Issues Related to Gold Imports and Gold Loans NBFC’s in India, 6 February 2013. 85 Latest RBI estimate for the informal and formal gold loan market.

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There is no official data on the amount of gold monetised by gold loan companies. But an assessment of the company reports of the two large southern India-based gold loan companies – Muthoot Finance and Manappuram Finance – reveals that in 2015 their combined gold collateral totalled around 200t.86 Perhaps more important

than the amount of gold being pledged as collateral, is how quickly these gold loan companies have developed (Chart 33). Their success is partly due to a stronger customer value proposition than some of their competitors; they typically process loans quickly. Banks, with a broad range of financial products, have generally found it difficult to compete with NBFCs, which focus on a narrow product range. The success of these gold loan companies is certainly not because of pricing; their interest rates are significantly higher than banks, although much lower than in the informal sector (Table 15).87 Table 15: Comparative analysis as at February 2016 88 Interest rates

LTV

Banks

Base rate + 2.5% to 5%

Up to 80%

Gold loan companies

12% to 24%

Up to 75%

Money lender/ Pawn broker

30% to 50%

Depends on the amount of loan and security

Source: Company websites; World Gold Council

Informal gold loan providers have a large market share.

Chart 33: Outstanding NBFC gold loans have grown rapidly since 2007 Rupees bn 700 600

Lower rates than the informal sector and better customer service than the banking sector have supported gold loan companies’ growth

500 400 300 200 100 0 2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

Source: RBI; Manappuram Finance; Metals Focus

86 The gold loan industry is mostly centred in Southern India. 87 NBFC interest rates can vary between 15%–25%, banks rates are typically base rate plus 2–4 percentage points, while pawnbrokers and money lenders’ rates are typically 30%–50%. 88 Company websites, Metals Focus.

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A low default rate is another factor underpinning gold loan companies’ growth. Defaults typically hover around 1%–2%.89 This is low compared with other loan products. For example, nationwide non-performing loans account for 4.3% of total Indian bank lending.90 A significant factor here is that people are loathe to relinquish their gold. While they are prepared to pledge it as collateral, they will often want it back, especially if it is a piece of jewellery or an ornament. Rising gold prices also made it quite lucrative for borrowers to settle their debt and take receipt of their gold. The corollary is that when the price falls, defaults rise. In 2013, the default rate shot up to 3%. Still low compared to other assets, but quite striking given the usually lower default rates for gold loans. Regulations for gold loan companies By early 2011, the gold loan companies’ strength in this market became an increasing cause for concern for the RBI. The central bank was worried about their rapid growth and the financial stability implications should gold prices tumble. The RBI took several steps to limit their presence in the gold loan market: • In March 2012, priority sector lending was removed from bank credit provided to gold loan companies.91 This pushed up their cost of financing • Later the same month, the RBI reduced the LTV gold loan companies could offer from 75% to 60%92 • In September 2013, they were only allowed to provide a loan by cheque 93 for loan amounts above Rs1 lakh (US$1,700) and they had to ensure they carried out full due diligence on the borrower • Finally, NBFCs were required to provide RBI-approved gold storage infrastructure. These measures made writing new gold loans more expensive and difficult: so the volume of business dipped. But in 2014, after a period of lobbying, gold loan companies succeeded in persuading the government to restore the 75% LTV limit and business has since recovered.94

Outlook The outlook for gold monetisation is interesting. The flaws associated with the first gold monetisation scheme – most significantly the minimum deposit size – are not present in the latest iteration and there are certain structural developments that may help this latest scheme flourish. First, there are more bank branches and more people have bank accounts than they did when the first scheme was launched. Second, India’s infrastructure has improved. It has an LBMA-accredited gold refinery, which can play an important role in this scheme by promoting trust in the gold flowing through the monetisation ecosystem. And the launch of the Indian Gold Coin and the New Hallmarking Act will provide a trusted gold product and standard for use by the banking system. But it still faces significant challenges. For the scheme to be a success it needs to address the key issues we have highlighted: trust, ease of use, incentives and infrastructure. If any of these are overlooked, the scheme may struggle. It is important that realistic expectations are set. Despite the significant stock of gold in India, our view is that little of it will be monetised anytime soon. It will take time to build the necessary infrastructure, for banks to develop and market the right products, and for customers to respond. Once that infrastructure is in place greater volumes of gold can be monetised; we envisage up to 25t being monetised within the next two to three years. We expect gold loans to continue to play a significant role in India, especially in rural communities. The make-up of the sector will evolve as the government presses ahead with its financial inclusion policies and the formal sector plays a greater role. Money-lenders and pawnbrokers could lose market share to banks and gold loan companies. Within the formal sector, because of tighter regulations governing gold loan companies, we can see a subtle shift in favour of banks.

89 Metals Focus, Company Reports. 90 World Bank. 91 https://rbi.org.in/Scripts/NotificationUser.aspx?Id=6248&Mode=0. 9 2 In 2014, after a period of lobbying, the RBI increased the LTV to 75%. 93 This was a move designed to encourage gold loan recipients to open bank accounts, if they did not already have them. 9 4 Muthoot Finance, Financial Results Q1 FY2016 presentation.

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7: Bullion trade Between 2000 and 2015 India officially imported 10,345t of gold bullion. Following the removal of the 80:20 rule a diverse range of Indian operations can now import gold, including banks, star trading houses, premier trading houses and exportoriented units (EOUs). Despite growth in shipments from a range of countries, Switzerland remains by far the most important source for official bullion imports, with its share rising from around 50% in 2005 to 55% in 2015. Gold doré imports have also grown sharply in recent years. In 2014, doré imports accounted for around 10% of total official imports; by 2015 the share increased to 24%. But changes to imports duties in 2016 cloud the outlook for doré inflows. Wholesale imports and importers Imports account for the lion’s share of India’s gold supply India is one of the largest consumers of gold in the world. But jewellery and industrial manufacturers remain heavily reliant on gold imports (Chart 34).

Over the past 40 years, gold has made its way into the country via a number of routes. Between 1963–1990, the Gold Control Act regulated the domestic market. Owning bars was illegal and jewellery fabricators and retailers needed licences to operate. Bullion dealers stopped trading. To meet demand, the gold industry was obliged – theoretically – to recycle existing gold stocks.95

Chart 34: Indian official imports of gold (fine gold content) Tonnes 1,200

1,000

800

600

400

200

0 2000

2003

2006

2009

2012

2015

Source: Indian Customs; Metals Focus; World Gold Council

9 5 World Gold Council, An Introduction to the Indian Gold Market, 2001.

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As we discuss in detail in Chapter 10, this Act was repealed in 1990 and in 1992 the Non-Resident Indian (NRI) programme 96 was introduced. This became the preferred route for bullion imports; upwards of 1,000t of gold was brought in by NRIs between 1992 and 2000.97 In 1997, as part of its programme to liberalise the economy, the government introduced the “Open General License” (OGL) scheme. Under this arrangement, banks were allowed to import gold into the country. The scope of participants allowed to import bullion has widened over the years and NRIs now officially bring only trivial quantities of gold into the country. A range of companies can import gold Although shipments are no longer restricted, various government agencies, including the Reserve Bank of India (RBI), the Director General of Foreign Trade (DGFT) and the Ministry of Finance, control who can import gold into India. Banks are authorised by the RBI, while agencies are covered by foreign trade policy (FTP) and are licensed by the DGFT. As of mid-2016, bullion can be imported by nominated agencies (including banks) and trading houses; nominated agencies account for the largest share of the bullion import trade. Aside from the companies named specifically as nominated agencies there are two larger groups of importers: Premier Trading Houses (PTHs) and Star Trading Houses (STHs).98 PTH/STHs are firms that have excelled in international trade and have successfully contributed to the country’s foreign trade. Under the new Foreign Trade Policy 2015–20, Premier Trading Houses and Star Trading Houses have been re-classified as Five Star Export Houses and Four Star Trading Houses. Each are defined by their ‘export performance’: specifically, the value of their exports during the current and previous two financial years. According to the new Foreign Trade Policy, Four Star Export Houses should have an export performance of US$500mn in at least two of the previous three years, rising to US$2bn for Five Star Export Houses.

Table 16: Companies importing gold in India Banks

Trading houses/agencies

Axis Bank

Metals and Minerals Trading Corporation Ltd (MMTC)

Bank of Baroda

Handicraft and Handloom Export Corporation (HHEC)

Bank of India

State Trading Corporation (STC)

Bank of Nova Scotia

Project and Equipment Corporation of India Ltd (PEC)

Corporation Bank

STCL Ltd

Federal Bank Ltd

MSTC Ltd

HDFC Bank Ltd

Diamond India Limited (DIL)

ICICI Bank Ltd

Gems & Jewellery Export Promotion Council (G&J EPC)

Indian Overseas Bank

EOU and SEZ gems and jewellery units, for their own consumption 

IndusInd Bank Ltd

Premier Trading Houses 

Kotak Mahindra Bank Ltd

Star Trading Houses (only for the gems and jewellery sector) 

Karur Vysya Bank Ltd Oriental Bank of Commerce PNB South Indian Bank Ltd State Bank of Hyderabad State Bank of India Union Bank of India Yes Bank Ltd The Ratnakar Bank Limited Source: Metals Focus; World Gold Council

There are clear differences in how these entities are allowed to execute gold imports and for what purpose. Banks import gold on a consignment basis,99 whereas nominated agencies, STHs and PTHs are only allowed to import on a direct payment basis. Bullion bars.

9 6 This was an initiative of the Ministry of Commerce and Industry, which enabled large quantities of gold bullion to be imported officially. Under this scheme, NRI’s were allowed to bring in up to 10kg of gold bars and other approved gold items if they had been away from the country for a minimum of six months. 97 World Gold Council, An Introduction to the Indian Gold Market, 2001. 9 8 STH and PTH are import and export houses, some of which are also manufacturers. All exporters of goods, services and technology with an import-export code (IEC) are eligible for recognition as a STH/PTH. Recognition depends on export performance. In 2015, the government amended the nomenclature of these entities to One Star, Two Star, Three Star, Four Star and Five Star Export Houses. 99 Trade on a consignment basis involves payment being made to the exporter only once the imported goods have been sold to the local customer. The exporter remains the owner of the goods until they have been sold.

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Up until the RBI lifted the restriction in February 2015, PTHs and STHs were prohibited from delivering imported gold to firms serving the domestic market, while banks and nominated agencies were not. Now, as their name would suggest, only export oriented units – EOUs – are prohibited from selling gold into the domestic market.

The imported gold flows from these airports into the country’s network of storage facilities. India is home to 11 bonded customs warehouses, one at each of the 11 points of entry, and around 30 gold vaults.

Official import trends

Key importing cities All of the gold officially shipped into India is by air, with 11 points of entry into the country. These airports are typically close to key manufacturing and trading hubs, namely:

There has been little change in the main countries shipping gold bullion into India In 2015 India imported around 939t 100 of refined gold bars and doré (officially) from over 30 countries; 101 60% came from just two countries – Switzerland and the UAE. The top five exporters to India have remained largely constant in recent years, even though new sources have emerged (Chart 35).102

• North: New Delhi • West: Mumbai, Ahmedabad, Jaipur • South: Bengaluru, Chennai, Cochin, Coimbatore, Hyderabad, Trivandrum

In the main, these countries export 1,000g cast, 995 and 999 fineness bars from refineries such as: Asahi Holdings (US and Canada), Rand Refinery (South Africa), Valcambi, PAMP, Metalor, Argor-Heraeus (all Switzerland) and the Perth Mint (Australia).103

• East: Kolkata. In 2015, 85% of gold imports came through airports located in northern and southern India, with the remaining 15% coming through airports in the East and West.

Chart 35: Top gold exporting countries to India during 2005-2015 Tonnes 1,200

1,000

800

600

400

200

0 2005

2006 Switzerland United States

2007

2008

United Arab Emirates Ghana

2009

2010

South Africa Dominican Republic

2011

2012

2013

2014

2015

Australia Others

Source: GTIS; Metals Focus

100 Of which around 710t is refined gold and 229t is gold dore (fine gold content). 101 GTIS. 102 Indian Customs, GTIS. 103 Gold Bars Worldwide, Grendon International Research.

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Gold doré imports have undergone significant change in recent years An interesting development in recent years has been the rapid growth in gold doré shipments (Table 17). One factor that triggered this growth was the import differential between refined bullion and gold doré. Up until 2016 the import duty on refined gold was 10% whereas headline import duty on doré was 8%, creating a duty differential of 2%. Although importers also end up paying other taxes, making the net duty differential less than 1%, there was a clear incentive to import doré. The path to expanding doré imports has, however, faced a series of challenges. (For more detail on the tax incentives to import doré, please see Chapter 8).

Table 17: Top countries of origin of gold doré imported by India104 (tonnes) 2012

2013

2014

Ghana

Country

0

1

13

73

USA

9

21

38

50

Dominican Republic

0

0

5

44

Tanzania

3

5

11

17

Peru

1

1

3

12

Other

10

9

5

33

Total

23

37

75

229

2015

Source: Metals Focus; World Gold Council

Focus: Gold pricing in India Price discovery in India is less transparent and efficient than other markets, such as London or Shanghai, which have either a formal gold exchange (SGE) or a structured OTC market. One reason is that, unlike London, India does not act as a global trading hub. The market is relatively closed: trading entities and refineries based in India are not allowed to export bars. Equally important is the fact that the Indian gold market is heavily regulated by the government. Two important factors help determine the gold price at which bullion is sold in the domestic market. The first is the landed cost of gold and the second, the premium or discount prevailing in the local market. The landed cost is determined by spot dollar gold prices, the US$INR exchange rate, and the custom tariff rate. The custom tariff is set by the government every fifteen days depending on the price of gold in the global market. The customs duty should not be confused with the tariff rate – the customs duty is levied on the tariff rate. This is to help maintain the uniformity of the duty value and to avoid under-invoicing.

The illustration below shows how the landed cost of gold was determined on 1 March 2016, using the prevailing gold price and custom rates: Table 18: Gold price in India Stages in determining landed cost of gold a LBMA AM Price (US$/oz) for 995 purity b Bank Charge (US$/oz) assumed at 0.25% (a*0.0025) c Total 995 price (US$/oz) (a+b) d Conversion to US$/kg (c*32.1057) e RBI Referrence Rate (USD/INR) f Conversion to Rs/kg (d*e)

1,240 3.1 1,243.1 39,910.6 68.2 2,720,226.7

g Custom Tariff in Rs/kg

2,751,105

h Custom duty (g*Custom duty rate at 10%)

275,110.5

i Landed Price in Rs/kg (f+h) Landed Price in Rs/10g

2,995,337.2 29,953.4

Source: Metals Focus; World Gold Council

104 GTIS, Indian Customs, Metals Focus.

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Focus: Gold pricing in India – continued India’s diversity plays an important role, with each region characterised by different seasonal patterns of demand and consumer tastes. And taxes vary across states. As a result, it is hardly surprising that India does not have a uniform gold price, with different trading centres each capable of creating their own gold price at any given time. For example, it would be a rare event to find that the gold price in Mumbai, New Delhi, Kolkata and Chennai were the same on any given day. The prices for 22k and 24k gold are usually notified by the local bullion association in each major trading hub, e.g. the local gold price in Kolkata (the capital city of the state of West Bengal) usually comes from the price published by the West Bengal Bullion Merchants and Jewellers Association (based in Kolkata), and the price in Chennai comes from the price published by the Madras Jewellers and Diamond Merchant’s Association.

The final selling price is the landed cost plus the premium or discount in the local market, which can lead to some large variations. There are several factors that can determine premiums and discounts. Most important is the interplay between international prices and domestic demand. For example, weak demand can push the market into discount. Premiums and discounts are also affected by factors such as inventories held by bullion dealers, manufacturers or retailers, and changes in the tariff rates (Chart 36).

Chart 36: India's gold price can differ greatly from the LBMA Gold Price (previously the LBMA fix) US$/oz 200

150

13 August 2013 Import tax increased to 10% from 8%

21 January 2013 Import tax increased to 6% from 4%

28 November 2014 Removal of 80:20 policy

22 July 2013 Introduction of 80:20 policy

100

1 January 2016 PAN card mandatory on jewellery purchases above 2 lakhs

50

Period of weak demand

0

5 June 2013 Import tax increased to 8% from 6%

-50

6 20 1 ch ar M

em

be

r2 01 5

20 15 be r em pt

D ec

15 20 Se

Ju ne

20 15 h ar c M

be r D

ec e

m

be r Se

pt

em

ne Ju

20 14

20 14

4 20 1

4 ar ch M

be em D ec

be pt em

20 1

3 r2 01

3 r2 01

13 20 Se

Ju ne

M

ar c

h

20

13

-100

Source: World Gold Council

India’s gold market: evolution and innovation

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Limited availability and competition are key roadblocks to sourcing gold doré According to Metals Focus, in 2015, globally, only around 1,600t of gold doré was available on the open market for export and refining, well below what was needed to satisfy demand. Of total global gold mine production of 3,211t, some 15% of this was recovered to concentrate, leaving around 2,600t mined in doré or gravity concentrate form.105

minted bar imports, and the 80:20 rule, under which 20% of imported gold had to be re-exported as finished jewellery.

But an important share of global doré can be defined as captive – it does not reach the international market.106 This covers doré mined in China (460t), Russia (263t), South Africa (166t) and Ontario in Canada (73t).107 This leaves around 1,600t of doré on the open market; significantly less than 2015’s global mine supply total.

Table 19: Unofficial gold bullion imports in India (tonnes)

The second challenge facing Indian refineries concerns the growing competition in sourcing this limited amount of doré. Global refining capacity has grown in recent years through a combination of new plants and upgrading of existing installations. And global recycling has declined sharply, from a record total of 1,728t in 2011 to an estimated 1,127t in 2015. Competition for doré is fierce. As is the 2016 change in import duties Beyond the challenges of sourcing the raw material, in the 2016 Budget, duties on doré imports were changed. This narrowed the differential between bullion and doré, thereby reducing the incentive for refineries to spring up and import gold doré. Indeed, the pressure in India’s refining industry is such that some refineries are now shutting up shop and doré imports have already started to shrink.

These measures created significant market distortions, which resulted in a surge in domestic gold premiums – at times during early 2014 exceeding US$100/oz. All of a sudden it became very profitable to smuggle gold into India (Table 19).

2012

2013

2014

2015

2016F

8

150

225

119

120-135

Source: Metals Focus; World Gold Council

A variety of routes are used to smuggle gold into India. The majority – around 65–75% – comes in by air, around 20–25% by sea, and 5–10% by land.108 Most of the gold flown into India comes from the Middle East, notably the UAE. Smuggling is usually carried out by low income workers returning home; they receive carrier fees as well as a sponsored air ticket. Smuggling via land or sea routes tends to occur through the relatively porous borders that India shares with its neighbours, notably Pakistan, Nepal, Bangladesh and Sri Lanka. In the first half of 2016, in response to the newly imposed 1% manufacturing excise duty, smuggling activity from Thailand also increased.

Outlook

Bullion import regulations have, at times, encouraged unofficial flows into India Given India’s insatiable appetite for gold and the restrictions the government has placed on imports, unofficial flows have often been an important, if problematic, source of gold supply for the Indian market.

Imports will remain the critical source of supply to India’s gold market for many years. In the short-term, the removal of some import restrictions will have two main benefits. First, nominated agencies will be better able to source bullion with which to meet the apparently ceaseless appetite for gold in India. Second, this increased flow of gold will likely make the environment less attractive for unofficial gold imports. That said, for 2015 our estimate for gold smuggled into India is not insignificant: we estimate 119t of gold landed in India through unofficial channels. And we expect 2016 gold smuggling to be higher, because of the 1% manufacturing excise tax.

The Gold Control Act created a lively market in smuggled gold, but its repeal in 1990 saw unofficial imports collapse as the market liberalised. Fast forward to 2013 and the government introduced several measures in an attempt to control gold imports, which had ballooned. This began with a gradual rise in the import duty which eventually reached 10%. This was followed by a ban on coin and

The outlook for doré imports is less certain. Indian refineries already face challenges in sourcing doré, and the reduction of the doré/bullion differential in the 2016 Budget has reduced the incentive for refineries to source doré. The huge excess refining capacity in India will come under further pressure in years to come, and we may see closures and consolidation in the industry.

Smuggling

105 Metals Focus. 106 Where the export of doré is prohibited, such as in China or Ontario, or where an export duty makes it uneconomic to export the doré, such as in South Africa. 107 Metals Focus, Gold Focus 2015. 108 Metals Focus.

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8: Gold refining and recycling Indian gold refining capacity jumped in recent years, encouraged by a favourable import duty framework. There are now 30 organised refineries, with a combined capacity in excess of 1,450t. Looking ahead, the refining industry faces some challenges and is likely to enter a period of consolidation. India’s gold refining landscape India is reliant on imports and recycling to meet gold demand India is dependent on gold imports, either in refined or doré form, to meet its needs. Gold imports account for around 85% of total supply, and the refining sector plays an important role in taking these imports and putting them in a form suitable for India’s gold industry. For example, either re-casting imported 1kg bars into smaller bars for onward delivery to jewellers, or refining doré into purer gold. The refining industry also recycles old gold jewellery, which accounts for around 15% of supply. The refining sector has grown in recent years India’s long-established refining sector has seen a sharp rise in new capacity in recent years. The organised refining landscape has grown sharply from a mere three or four refineries in 2013 to 30 in 2015, taking the total capacity above 1,450t. The majority of refineries have an annual capacity of less than 50t (Chart 37). While Rajesh Export’s refinery, with a capacity of 350t, is India’s largest, MMTC-PAMP is India’s only gold LBMAaccredited refiner, gaining its certification in 2014. It is likely that other refineries in India will follow MMTCPAMP’s lead, especially as the gold monetisation scheme develops. It is also likely that a small number of operations will soon reach the minimum threshold of 10t of annual

gold refining production. But this is just one criterion that must be achieved to become LBMA-accredited. Others include: a net worth of at least £15m; a minimum of five years of operations, three of which must have achieved the minimum production output; satisfying Know Your Customer (KYC) tests and, finally, the ability to implement the LBMA’s Responsible Gold Guidance.109 The informal sector accounts for a sizeable volume of capacity. By definition, this is extremely difficult to estimate, but we would not be surprised if the informal sector had a further 100–200t110 of refining capacity, taking India’s refining capacity overall to 1,600–1,700t. Chart 37: India’s refining landscape

Number of refiners >50t 19 51-150t 6 151-250t 3 >250t 1

Source: Metals Focus; World Gold Council 38%

109 London Bullion Market Association. 110 Metals Focus.

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Tax incentives have encouraged doré imports The expansion of the organised sector has been supported by a favourable government stance, including the bullion/ doré import duty differential. But much of this additional capacity remains under-utilised, largely because of the difficulty in sourcing doré and the limited availability of recycling material. It is likely Indian refineries are operating at only 15%–20% of their capacity and although some 26 refineries imported doré in 2015, over 90% of imports were concentrated among just six refineries.

Today, the Indian refining landscape can be divided between two distinct zones: the Domestic Tariff Area (DTA) and the Excise Free Zone (EFZ). Refineries based in DTAs are liable to pay countervailing duty (CVD), as well as excise duty, whereas those operating in EFZs just pay the CVD; they do not pay excise duty.

Figure 1: A stylised illustration of the doré/bullion import differential Ghana

Switzerland

Tanzania

USA

USA

UAE

Doré imports

Bullion imports

Tax: 8.75% (8%) CVD

Tax: 10% BCD

Refineries in EFZ (Excise Free Zone)

Refineries in DTA (Domestic Tariff Area)

No excise duty

9.35% (9%) Excise duty, CVD rebated

Refined bars sold to bullion dealers, jewellery manufacturers and jewellery retailers

Refined bars sold to bullion dealers, jewellery manufacturers and jewellery retailers

Effective Tax: 8.75% (8%)

Effective Tax: 9.35% (9%)

Tax differential between refined bars from EFZ and imported bullion bars: 1.25% (2%)

Tax differential between refined bars from DTA and imported bullion bars: 0.65% (1%)

Bullion banks, trading houses and nominated agencies (trading houses include Rajesh Exports, Zaveri & Co. Ltd; nominated agencies include MMTC, PEC Ltd., STCL)

Refined bars sold to bullion dealers, jewellery manufacturers and jewellery retailers

Tax: 10%

Key: Tax: Percentages within brackets refer to pre-February 2016 union budget tax rates, percentages outside the brackets refer to the current, post-2016 union budget tax rate

India’s gold market: evolution and innovation

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Spurred on by these tax incentives, around half of new capacity since 2014 has been concentrated in EFZs; as of 2015 just 16 refineries operate outside of the EFZ. This is explained by the headline import duty differential between refined gold and doré. Until early 2016, this differential was around 2%: basic custom duty (BCD) on refined gold of 10% compared with 8% CVD for doré. As a result, refineries were able to import doré at 8%, in contrast to the 10% rate at which permitted banks or nominated agencies could import refined gold. Since the FY2016–17 union budget (in which the import duty on doré was increased to 8.75%), that differential has shrunk to 1.25%. Nevertheless, the incentive remains. When assessing the margins made by refiners, excise duty must be considered (Figure 1). All products manufactured in India attract excise duty, which for gold is 9.35%. This means that a refinery in the DTA is liable to pay 9.35% on its finished product. The government, however, allows the excise duty to be offset against the 10% import duty and so refineries in the DTA pay 9.35% as the import duty, giving them a differential of 0.65%. In contrast, refineries in the EFZ are exempt from the excise duty and so pay an 8.75% import duty, thus maintaining a 1.25% differential. In order to rationalise the duty differential between the DTAs and the EFZ, the government has levied an entry tax of around 0.2% in Uttrakhand – the region where most of the refineries under the EFZ operate. The duty differential, along with the extremely low cost of refining (of around US$2–3 per ounce), leaves refineries with a margin of between 0.65%–1.25%, depending on the zones in which they operate. India’s legislative landscape: controls on growth in refining and responsible sourcing of doré The government has two legislative areas that are designed to protect and enhance the reputation of Indian refiners and the country’s jewellery export industry. The first concerns the rules for setting up a refining operation. These include, but are not limited to: pollution control licences; a charter engineer certificate of capacity justification; and registration with the appropriate bodies, e.g. State Department of Industries/Small Scale Units and recognised trade bodies. If the refinery wants to import doré, it needs approval from the Director General of Foreign Trade.

India’s gold market: evolution and innovation

The second relates to guidelines that must be followed when sourcing doré for refining. These include, but are not limited to: ensuring the goods are sourced directly from the country where the doré is produced; a minimum weight of 5kg per bar; the inclusion of both a packing list and an assay certificate, to be issued by the mining company and the latter to be provided to the Deputy Commissioner of Customs and an assay certificate issued by the mining company and provided to the Deputy Commissioner of Customs by importers. The aim of this legislation is to help the industry establish a chain of custody. For refiners, the aim is to ensure that the imported doré is genuine rather than, recycled gold or manufactured doré. Many in the industry believe that in time this legislation could increasingly reflect international standards. This would benefit those Indian refineries that choose to apply for LBMA accreditation. The government is also mindful of the potential reputational issues that jewellery exporters may face in the future if they use gold that is not responsibly sourced. The legislation aspires to protect against this. Products offered by Indian refineries Product offerings by global refineries can be distinguished between speciality products (such as precious metals chemicals including gold potassium cyanide and other salts) and general products, including kilo bars, minted bars and investment bars. Very few refineries in India offer speciality products. The majority of Indian refineries produce larger bars or 100g cast bars for use by jewellers and other precious metal manufacturers. Some also offer 100g minted bars to jewellers. Over the years, Indian consumers have become increasingly aware of a growing range of investment products available globally. This in part reflects high profile promotional campaigns by banks, e.g. ICICI, HDFC, Indian Bank, which – before the restrictions were imposed – offered imported minted and investment bars. This in turn has encouraged Indian refineries to enhance the quality of their minted bar offering, both in terms of purity and packaging.

63

Some of the most common investment products offered by these refineries include 2g, 5g, 8g, 10g and 50g bars and coins. The premiums on these bars and coins can vary from 2%–8%, depending on the refinery and the product offering. But in general, the higher the denomination, the lower the premium. Premiums also vary depending on the distributor; direct purchase from the refiner attracts a lower premium than when buying from a bullion dealer. Premiums are higher still when gold is purchased through a financial intermediary. Finally, refineries can also offer minted bars and investment bars made available as blanks. Blanks are basically round or rectangular shaped gold or silver coins and bars, to which the seller adds their name.

Recycling trends Recycling is an important source of supply for jewellers Recycled gold plays an important role in India’s gold supply, fulfilling around 15% of Indian jewellery fabrication needs since 1990. Payout rates offered by retailers differ according to the type of old gold jewellery being sold. A customer would typically receive 100% of the weight of the gold content for hallmarked 22k jewellery. The payout rate used by the jeweller, however, will not be the gold price itself. It will typically be around 5%–7% below the jeweller’s selling rate. If the gold being sold back by the consumer is not 22k purity the payout rate will fall as the caratage decreases:111 21k typically receives 85% of the weight of the gold content; 20k 82%; and 18k 75%. These rates vary across the country, according to the type of jeweller and the bargaining power of the seller. Consumers in rural India sometimes receive lower payout rates, usually between 80%–85% for 22k. This is largely because awareness of caratage in rural India is relatively low; 18% of rural Indian respondents to a consumer survey we conducted in early 2016 said they did not know the caratage of their jewellery. Consumers may get a better deal in the not too distant future. Developments in hallmarking – as outlined in Chapter 10 – will provide consumers with greater certainty over the caratage of their jewellery. Refineries such as MMTC-PAMP and Bangalore Refinery, as

Indian recycling Recycled gold has accounted for around of Indian jewellery fabrication since 1990

15%

well as the gold loan company Muthoot, have set up recycling collection centres in major towns, sometimes in conjunction with jewellers. If successful, recycling collection may become more organised, efficient and higher profile. Increased transparency in this part of the market could see consumer payout rates rise. Recycling definitions Before we delve into the detail, a distinction needs to be made between two types of recycling: gold sold for cash and gold exchanged for gold. In many price-sensitive markets – such as China, Turkey and India – consumers often exchange their gold jewellery, bars or coins, for new pieces of gold jewellery. The only cost to them is the making charge. This can provide a significant flow of gold. For example, in Chapter 2, we discussed how in the run up to the wedding season many families will exchange gold that has been accumulated over many years for new pieces of wedding jewellery. Gold sold for cash, on the other hand, is the recycling estimate we report in Gold Demand Trends. This represents the supply of gold to the market as a result of people selling their gold, and plays an important role in understanding supply and demand dynamics. In this section we touch upon both types of recycling to provide as complete a picture of the recycling market as possible. Jewellery is the largest source of recycling There are three sources of gold recycling: jewellery, manufacturing scrap, and end-of-life industrial products. Jewellery scrap is the largest segment, accounting for 90%–95% of all recycled gold. This is sourced from individuals (either selling gold for cash or exchanging it for new gold), or pawn brokers and gold loan companies selling gold used as collateral for defaulted loans.

111 Metals Focus, discussions with a cross section of prominent retail jewellers across the country.

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While some major cities have a small number of gold scrap aggregators that collect from the public, individuals wishing to recycle their gold typically use their local jeweller for these transactions. As the majority of jewellers run their own melting shops, they often take old jewellery from pawn brokers or money lenders as well. Although pawn broker default rates are extremely low by international standards, we estimate they may be as high as 10%–15%.112 Gold loan companies also auction gold jewellery that has been pledged, but on which customers have subsequently defaulted – usually between 1%–2% of their total assets (see Chapter 7). This can be bought either by jewellers or by refiners. Manufacturing, or process, scrap113 is largely the wastage that occurs from manufacturing gold jewellery or investment products. Since most jewellery is manufactured either by standalone or organised manufacturers, or by retail jewellers themselves, and is typically high carat, the wastage is often recovered and processed by jewellery manufacturers. Rarely does it flow to refineries.114

Industrial recycling accounts for a very modest share of total Indian gold scrap supply. Even so, three points are worth making. First, in keeping with other markets, Indian collectors have experienced a decline in the grade of material being processed, as the precious metal content in, for example, old mobile phones and printed circuit boards, continues to fall. Second, the bulk of this material is treated overseas and tends not to re-enter the Indian gold market. Finally, where precious metals are recovered from old industrial products domestically, it is largely an informal industry.115 Chart 38 captures all three of these types of recycling. It is a broader definition for recycling than we use in Gold Demand Trends; it also includes old gold that is exchanged for new gold and subsequently refined, as well as imported jewellery due to be recycled. This broader definition gives a better sense of the total volume of recycled gold flowing through India’s refineries and manufacturers, rather than just the call on the market as measured by our narrower, Gold Demand Trends’ definition.116

Chart 38: Total Indian old gold recycling,* 2010-2015 Tonnes 350

Recycling peaked in response to high prices in 2012

300 250 200 150 100 50 0 2010

2011

2012

2013

2014

2015

* This is a broader definition of recycling than that used in Gold Demand Trends. This includes recycling of imported jewellery scrap, recycling generated by manufacturing and also scrap sourced from the retail trade where old jewellery is exchanged for new jewellery (where the customer, therefore, pays only a labour charge, as well as any difference in the weight between the two pieces). Source: Metals Focus; World Gold Council

112 Metals Focus. 113 See Glossary in Appendices. 114 Metals Focus. 115 World Gold Council and the Boston Consulting Group, The Ups and Downs of Gold Recycling, Understanding Market Drivers and Industry Challenges, March 2015. 116 Recycled gold as defined in Gold Demand Trends measures gold sourced from fabricated products that have been sold or made ready for sale, which is refined back into bullion.

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Key drivers of gold recycling in India Despite being the fourth largest recycler in the world, India recycles remarkably little of its stock of gold (Table 21). In 2015 recycling represented less than 1% of total household gold stocks. But the above-ground stock of jewellery plays an important role in the level of recycling. We know India has a huge stock of gold – some 23,000–24,000t. This will only increase over time and as it does so we can expect the level of recycling to slowly rise too. We see this at a global level: over the past 35 years, as the global stock of jewellery has increased so too has the level of recycling. Table 21: Top six gold recycling countries* 2010–15 (tonnes)117 2010

2011

2012

2013

2014

2015

Total

United States

229

306

224

161

104

85

1109

Turkey

140

105

156

92

123

166

782

China

129

127

140

98

118

107

719

India

82

84

118

96

93

80

553

Italy

95

119

120

105

86

83

608

Iran

63

45

66

43

57

38

312

* This is the same definition of recycling used in Gold Demand Trends. It captures scrap generated in the country of origin, irrespective of where the material is refined. It excludes scrap generated as a result of the exchange of old for new jewellery at the retail level. It also excludes production/process scrap. This metric is therefore designed to capture the call on each respective gold market.

But what else affects the level of recycling? Our econometric analysis revealed that a 1% increase in GDP pushes Indian recycling down 0.5%. It is intuitive that as people become richer they are less inclined to sell their gold. In other words, the volume of ‘near market’ jewellery stocks diminishes. We also see this in consumer research. Between 2013 and 2014 we surveyed over 10,000 Indian consumers and those with the highest level of income were the least likely to sell their gold (Chart 39). Higher prices, however, boost recycling: a 1% price increase pushes up recycling by 0.7%. While this may be intuitive, we can delve into the topic in a little more detail. Prices can be broken down into three inter-related areas: prevailing price levels, the rate of change in prices, and consumer price expectations. At any given time, there are key price points which will act as buy or sell signals for consumers, although these will change as price expectations change. This in turn will be affected by price volatility. For example, recycling may not rise in line with gently rising prices, as consumers may expect prices to continue rising. But when prices jump, recycling will often jump too, as consumers take advantage of an unexpected price increase. When prices fall and are expected to weaken further, people sell gold in order to raise cash. They then use that cash to re-enter the market at a time they believe prices have bottomed out.

Source: Metals Focus; World Gold Council

Chart 39: Higher income households are less likely to sell gold jewellery % of respondents who had sold gold in the past 12 months 45 40 35 30 25 20 15 10 5 0 500,000 Rupees

Source: Kadence; World Gold Council

117 Metals Focus, Gold Focus 2016.

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Outlook India’s refining industry has gone through a remarkable period of change since 2010. Its capacity has increased by 750t over the past two years and the country has its first LBMA-accredited gold refinery; it is likely others will follow suit. This new-found capacity has generated a huge appetite for doré, from almost nothing in 2013 to just over 300t in 2015. This is a remarkable change in the dynamics of Indian imports. However, the latest change in duty structure will likely reduce this inflow of doré, as it is now more difficult for smaller refineries to source the material. There is overcapacity in the refining industry and we believe the sector will likely enter a phase of consolidation.

A number of policies will continue to support recycling and refining. Another pillar of support is Prime Minster Modi’s “Make in India” campaign. The aim of this programme is to attract overseas investment and make the country a global manufacturing hub. One of the proposals from the jewellery industry is to develop a gold policy which includes, among other things, gold recycling. Finally, there is the gold monetisation scheme. Initially, we believe it will mobilise only a modest amount of gold. But over time, if the scheme is well structured, this could grow. Increased recycling levels will also, at the margin, support the refining industry.

The threats to the industry are two-fold: sourcing sufficient doré to utilise the industry’s capacity, and protecting India’s refining and recycling reputation. The government is keenly aware of the threat to India’s reputation, and has put in place legislation and processes to protect and improve it. Over time, it is likely these will edge ever-closer to international standards.

Refining sector

2013

to

2015

Capacity in the industry increased by

India’s gold market: evolution and innovation

750t

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9: Gold mining India has a long history of gold mining, but current production levels are very low; in 2015 India mined less than 2t. The industry does, however, have potential. Mineral reserves and resources total 71.9t and 574.3t respectively.118 Over the coming years mine production is expected to grow modestly as new mines enter the production phase. But the industry faces significant challenges. For mining to develop in India, regulations need to be reviewed and the industry needs investment. Gold mining history

Southern India has gold-favourable geology

India has a rich heritage of gold mining, albeit on a small scale Although gold mining dates back to the first millennium BC, in the twentieth century the sector was dominated by the Kolar Gold Field, near Bangalore. The field is hosted within the Kolar Greenstone Belt, a 3km to 6km wide by 80km long band of greenstone geology – a terrain similar to that which hosts many of the world’s most significant gold discoveries. The Belt predominantly lies along the southeast edge of the state of Karnataka, but also under parts of Andhra Pradesh and Tamil Nadu.119 The Kolar Gold Field produced more than 800t of gold during its 120 year history before its closure in 2001.120 During the first two decades of mining (1884–1904) the average grade of ore produced from the shallow underground mine was an impressive 45g/t, while over its total 120-year life span the average ore grade was 15g/t.121 In comparison, gold grades from South Africa’s prolific Witwatersrand Basin have averaged around 9g/t over a comparable time frame.122

Hutti Gold Mines (Raichur District)

Andhra Pradesh

DharwarShimoga Basin

Kolar Gold Belt Bengaluru 100km Kamataka

N 0

100km

Kerala

Tamil Nadu

Geology legend Gold locations Pan-African granulite facies terrain Proterozoic volcanosedimentary fold belts (Neliore) Deccan flood basalts

Late archean granulite facies terrain Archean-early proterozoic granitoids with enclaves of archaean and early proterozoic greenstone belts Archean greenstone belts Peninsular gneiss and migmatites

Proterozoic and younger sedimentary basins Eastern ghats mobile belt

Source: Kolar Gold

118 Ministry of Mines, Government of India – Annual Report 2014–15; in terms of gold metal content. 119 Kolar Gold (www.kolargold.com.au) 120 Geological Survey of India (www.portal.gsi.gov.in) 121 Kolar Gold (www.kolargold.com.au) 122 South African Chamber of Mines (www.chamberofmines.org.za)

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During the latter years of the Kolar Gold Field, gold was primarily extracted from three mines (Champion, Mysore and Nandydroog) within the East Kolar region. Mining became uneconomic in the late 1990’s due to poor management, a lack of exploration, under-investment and a misplaced focus on labour-intensive deep underground mining. The Kolar operations were finally abandoned in 2001. By this time, the mine had reportedly reached a depth of 3,200mn, while workings stretched along a 7.3km strike and included 100 shafts and 1,400km of underground development. The other significant gold producer in India has been Hutti Gold Mine,123 located in the Raichur district of Karnataka. The operation initially entered production in 1902, although it subsequently closed in 1918. Since its restart in 1947, through to 2014, it has produced some 90t of gold, and

is currently the only gold producer in India. Ore from the main Hutti mine is now supplemented by satellite feeds from the Uti (open pit) and Hira-Buddinni (underground) deposits, and the company currently has reserves for another 50 years of mining124 (Chart 40). Historically, gold has also been produced from a number of other deposits, including as a by-product of domestic copper production. These additional sources have been limited in volume. The other main source of gold production in India is from Birla Copper’s125 copper smelter at Dahej, Gujarat, which processes imported copper concentrate. The plant has an installed gold capacity of 15t/yr,126 although is currently only producing around 8 –9t/yr.

Chart 40: Indian mine production from primary source* 1970-2015 Tonnes 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

*Mine production includes production from primary sources only and does not include gold output from secondary sources e.g. Birla Copper Smelter which processes imported copper concentrate. Source: Indian Bureau of Mines; Metals Focus

123 Hutti is currently the only company mining for gold in India, and is fully-owned by the Governmernt of Karnataka. 124 Hutti Gold Mines (www.huttigold.co.in) 125 Birla Copper is a subsidiary of Hindalco Industries. 126 Indian Minerals Yearbook 2013 (52nd Edition), Part II: Metals and Alloys, Gold – Government of India Ministry of Mines, Indian Bureau of Mines.

India’s gold market: evolution and innovation

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India gold mineral reserves and resources

These reserves are concentrated regionally: over 99% of gold mineral reserves are located in the state of Karnataka. The remaining gold reserves are in Jharkhand, although at under 0.2t, these are trivial.

Gold has been discovered in a broad range of locations across India, although nearly all economically extracted mineral reserves are currently located in Karnataka. According to data published by the Ministry of Mines,127 India’s current defined gold reserves128 total 71.9t (14.6Mt at 4.9g/t). In addition, 568.5t of gold (480.2Mt at 1.18g/t) is defined in the primary (hard rock) resource category, while 5.9t (26.1Mt at 0.2g/t) has been defined within placer deposits (Chart 41).

Gold resources – gold deposits that are potentially economically viable – are a lot more geographically diverse. Over 50% of mineral resources are located in Karnataka, 33% are in Rajasthan, 6% in Bihar and 5% in Andhra Pradesh, while the remaining 6% are spread across a further eight states.

Chart 41: Indian gold reserves and resources are concentrated in Karnataka and Rajasthan Tonnes 350 300 250 200 150 100 50

s er th O

Ch at

tis

ga

rh

la ra Ke

h es ad M

ad

hy a

Jh ar

ra An dh

Reserves

Pr

kh

Pr ad

an

es

d

h

r ha Bi

th as Ra j

Ka

rn a

ta

ka

an

0

Resources

Source: Indian Bureau of Mines Indian Minerals Yearbook 2014

99%

Over of gold mineral reserves are located in the state of Karnataka

127 Ministry of Mines, Government of India – Annual Report 2014–15. 128 Reserves are that part of the reserve base that can be economically produced or extracted at the time of determination.

India’s gold market: evolution and innovation

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Future of gold mining in India India’s gold mining industry has been hampered by bureaucracy and under-investment Despite India being one of the world’s largest consumers of gold, until recently there had been no real policy push to promote domestic mining. A few private and locally-listed companies started up after legislation was passed in 2003 allowing private organisations to apply for mining leases. But it is not an easy market to enter: in some cases, companies have been waiting more than five years for permit approval. As a result, there has been limited investment in gold exploration over the past decade, particularly from the private sector. As of March 2013, there were 13 mining leases granted for gold across the whole of India:129 eight in Karnataka, three in Andhra Pradesh, one in Jharkhand and one in Rajasthan. In 2014, however, mining was only undertaken within three of these permit areas: Hutti, Uti and Hira-Buddinni, all located in Karnataka and operated by Hutti Gold Mines. While the industry is small, it has potential to grow Some in India have very high expectations for gold mining. In its 12th five-year plan (2012–17) formulated in 2011,130 a government of India working group outlined that with adequate investment annual production could be as high as 70t by 2030. While this is unlikley, it does highlight the ambition to grow India’s gold mine production. As new projects reach their production phase, Indian gold production could grow, albeit from a very low base. Deccan Gold Mines expects to bring its flagship Ganajur Main Project (Karnataka) into production in 2017. With output expected to average 1.6t/yr, the project could

double India’s production from current levels. Furthermore, Deccan is in the process of acquiring the Jonnagiri gold project (Andhra Pradesh) from Geomysore Services (India) Private Limited. A mining lease was granted for Jonnagiri in October 2013, and so the project appears likely to add further ounces to Deccan’s future production profile by 2020.131 Government has made some progress recently in helping the industry to grow In May 2016, Parliament approved an amendment to the Mines and Minerals (Development and Regulation) Act 1957 (MMDR), which allowed private companies to bid for mining leases via a competitive auction process and proposed that mining leases for major minerals to be granted for a period of 50 years, compared with the previous 30-year limit. Further amendements were also accepted, under which transfer of captive mining blocks 132 could be allowed without need for auction. Under the initial issue of 43 mining blocks for tender, three are gold mining deposits. In February 2016, London-listed Vedanta resources became the first private company to successfully bid for a gold mine in India – the Baghmara gold mine in Chhattisgarh – a mine with potential gold reserves of 2.7t of contained metal. The National Minerals Exploration Policy (NMEP), approved in June 2016, is designed to similarly stimulate mining exploration. The policy allows private companies to enter into a transparent bidding process, conducted via e-auction, to carry out exploration of mineral-bearing areas. The company submitting the winning bid would be entitled to a share of the royalty paid to the relevant state government. This policy – aimed at accelerating exploration activity – opens the way for the auction of 100 prospective mineral blocks.133

129 Ministry of Mines, Government of India – Annual Report 2014–15. 130 The 12th Five Year Plan, Sub-group II, Metals and Minerals, Strategy based upon the demand and supply for Mineral Sector, Mineral Exploration and Development (Other than Coal and Lignite) – Government of India Planning Commission. 131 Deccan Gold Mines (www.deccangoldmines.com) 132 A captive mining block is used to meet the needs of block owner, or of the parent, subsidiary or affllaites of the mine owner and the output from the mining block is not intended for open market sale. 133 http://www.narendramodi.in/cabinet-approves-national-mineral-exploration-policy-498586

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More can be done to ensure gold mining reaches its full potential Although the recent developments bode well in terms of helping India’s mining sector to realise its potential, a number of progressive steps would boost domestic gold production, as well as encourage the wider mining sector. These include: Reducing bureaucracy • State and central government agencies should simplify the permitting process, perhaps with the introduction of a single window clearance system. At present, permitting applications have to be signed off by a large number of departments and different ministries, which can make the processes very lengthy. It is not uncommon for a licence to require approval from at least 15 to 20 different authorities. Reducing the time and paper work required to obtain permits would lower the cost of bringing a new mine into production. Promoting investment • The mining sector needs funds to grow. Central and state government should incentivise investment within the sector, as well as ancillary sectors that support the mining industry, such as power and transport, which have also been starved of capital investment • Making gold mining a strategic sector and bringing it under the Infrastructure category 134 would provide tax breaks for investors. This would boost rates of return on what are often significant upfront capital investments

Economic impact of gold mining Gold mining can provide significant sustainable socioeconomic development to India. This is not just through the investment required to explore and mine for gold, but also through the legacy of creating a skilled workforce. Furthermore, mining helps bring infrastructure investment to a region, and helps initiate and support associated service industries, all of which often persist long beyond the working life of the mine. Mining can provide significant employment opportunuities to rural areas. Currently, Hutti Gold Mines employs 5,000 skilled workers and contractors, and it is estimated that each of those workers supports around five dependants. Our report, The social and economic impacts of gold mining, published in 2015, showed that 70% of total expenditure by gold producing companies was via payments to local suppliers and contractors, as well as wages to employees. This highlights the important impact even a small gold operation can have on its community. And given that India is one of the world’s largest gold consuming countries, it makes sense for it to develop mining capacity. For this to happen, changes need to be made. Bureaucracy needs to be reduced and investment encouraged. There are encouraging signs here, with the changes to the MMDR and introduction of the NMEP. If this trend continues, maybe India’s mine production could grow from its current low level.

• A Public Private Partnership (PPP) model would help promote rail, port and grid capacity, as has been the case with other infrastructure projects in India, such as roads, metros and airports. This would provide the infrastructure neccessary to improve the economics of future mining projects.

5,000

Hutti Gold Mines employs people, and it is estimated that each of those workers supports around five dependants.

134 RBI: As per the expanded definition of infrastructure, this is made up of the following categories: a) energy, b) communication, c) transport, d) water and sanitation, e) mining, exploration and refining, and f) social and commercial infrastructure; various infrastructure sub-sectors are also included within each category.

India’s gold market: evolution and innovation

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10: Gold policies India has a long-standing affinity with gold, but its gold-policy measures have often been muddled. Historically, they have distorted the market without achieving the policies’ aims. Some recent developments suggest the policy approach is improving: the Indian Gold Coin and proposed hallmarking regulations will develop a trusted standard of gold that can be traded more easily. This may support the government’s gold monetisation scheme. A brief history of gold policies India’s track record on gold-related policies is both long and varied The government’s interest in the gold market dates back to independence in 1947. To understand better the current gold policy environment one needs to understand India’s policy history which, broadly speaking can be broken down into four phases.135 1. Restriction (Ban on private ownership of gold) Between 1947–1962 policies were geared towards controlling the gold market. The stated objectives behind this restrictive approach were to wean people off gold, to regulate supply, reduce smuggling, and reduce the domestic price of gold. 2. Prohibition (Era of Gold Control Act) This restrictive approach was enhanced between 1963 and 1989. The Gold Control Rules were promulgated in 1963 and the final provisions were enacted under the Gold (Control) Act 1968, whereby several additional restraints were placed on gold businesses, including: • Manufacturing gold jewellery above 14-carat purity was prohibited • Limits were placed on individual holdings of gold jewellery • Individuals and families could only hold up to two and four kg of gold, respectively, and only in the form of jewellery, which had to be declared to the authorities

At the same time the government tried to mobilise gold by issuing gold bonds, introducing gold auction schemes and through the Voluntary Disclosure of Income and Wealth (Amendment) Ordinance (1975),136 which encouraged Indian households to disclose hitherto undeclared wealth, including gold. These efforts were designed to control the budget deficit and reduce gold smuggling. 3. L  iberalisation (Government policy aimed at deregulation) Between 1990 and 2011 India started to liberalise (see Chapter 1) and a different approach was adopted, as the government introduced measures to deregulate the gold industry: • The Gold (Control) Act was repealed on 6 June 1990. Under this policy regime gold smuggling had flourished. Now, the liberalisation of gold imports took priority137 • The Non-Resident Indian scheme was introduced in 1992, and in 1994 a Special Import Licence (SIL) scheme was launched to facilitate entry of gold into India • In 1997, under the Open General Licence (OGL) scheme, seven banks were initially authorised as official importers of gold; this number later increased to 20 • In 1999, the government tried to mobilise gold through the Gold Deposit Scheme (GDS), launched by the State Bank of India to allow gold to be deposited at a specified interest rate.

• Jewellers were obliged to maintain records of all business transactions.

135 For more information, please see Why India Needs a Gold Policy, Federation of Indian Chambers of Commerce and Industry, 2014. 136 Voluntary Disclosure of Income and Wealth (Amendment Ordinance 1975- http://incometaxindia.gov.in/Communications/ Circular/910110000000001074.htm 137 The Gold (Control) Repeal Act, 1990; http://lawmin.nic.in/legislative/textofcentralacts/1990.pdf

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The end of this phase was marked by rising gold demand, gold imports and gold prices. In 2007, demand totalled 771.1 tonnes. It peaked at 1001.7 tonnes in 2010, reduced slightly in subsequent years, but remained between 850–950t. At the same time, the gold price more than trebled and the current account deficit (CAD) began to spiral out of control. (For more information on the macro-economic back-drop, please see Chapter 1)

4. Intervention (Period of high customs duty and 80:20 policy) The deterioration of the current account deficit threatened to affect the country’s credit rating. Global uncertainties – caused by quantitative easing and the European crisis, which affected India’s exports and investment flows – and an unfortunate convergence of adverse domestic governance issues were the primary triggers.

Review of gold policy since 1947 Restriction (1947–62)

Intervention (2012–2013)

• Foreign Exchange Regulation Act (FERA) introduced in 1947

• Duty hike to 10% from 2% through repeated increases between January 2012 and August 2013

• Nationalisation of Kolar gold mine at Mysore took place in 1956

• Introduction of the “80:20 rule”, an export obligation of 20% on importers of gold138

• Replacement of the proportional reserve system with the minimum reserve system for currency issue in 1956

• Ban on import of gold coins and sales through banks and post offices139

• First Gold Bond Scheme introduced in 1962.

• Reducing the loan that can be given against gold as collateral from 75% to 60% of the value (LTV ratio).140

Prohibition (1963–1989)

Transparency (2014–end-2016)

• Gold Control Rules (1963) • Gold (Control) Act (1968)

• Removal of “80:20,” an export obligation of 20% on importers of gold (November 2014)

• Gold Bonds 1980 (March, 1965)

• Ban lifted on import of gold coins (November 2014)

• National Defence Gold Bonds 1980 (October, 1965)

• Gold Deposit Scheme of 1999 withdrawn and relaunched in new form as Gold Monetisation Scheme (November 2015)

• Voluntary Disclosure of Income and Wealth (Amendment) Ordinance (1975) • Gold auctions (1978). Liberalisation (1990–2011) • Gold Control Act 1968, repealed in June 1990

• Launch of first ever National gold coin – Indian Gold Coin (November 2015) • Sovereign Gold Bond Scheme launched (November 2015)

• NRI Scheme introduced in March 1992

• PAN (Tax Number) made mandatory on jewellery purchases above Rs200,000 (January 2016)

• Scope of Special Import License (SIL) scheme expanded to include gold in April 1994

• Introduction of 1% Excise duty on Jewellers above Rs120mn turnover (April 2016)

• In 1997, seven banks were authorized to import gold – a number that was later increased to twenty banks. Gold Deposit Scheme (GDS) launched by State Bank of India in 1999

• Demonetisation of INR500 and INR1,000 notes (November 2016)

• Gold Deposit Scheme (GDS) launched by State Bank of India (1999) • Banks permitted to sell gold coins in 2002, extended to India Post in 2008.

• Removed 1% excise duty on branded gold coins with purity of 99.5% (December 2016) • New Bureau of Indian Standards (BIS) Act introduced that makes Hallmarking mandatory, effective 1 January 2017.

138 RBI/2013–14/148, A.P. (DIR Series) Circular No.15, 22 July 2013. 139 RBI/2013–14/187, A.P. (DIR Series) Circular No. 25, 14 August 2013. 140 RBI Notification RBI/2013–14/260, DNBS.CC.PD.No.356 /03.10.01/2013–14, 16 September 2013.

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Resolving these required deepseated structural reforms, but instead policymakers settled for a short term “solution” of erecting barriers to curb imports. And gold was an easy target. On January 17, 2012, custom duty was raised to 2% and then again to 4% on March 16, 2012. The following year the import duty continued to rise, eventually reaching 10%, and the government introduced a new set of restrictive policy measures aimed at curbing demand. The measures were imposed to address the sudden deterioration in the CAD. 5. T  ransparency (Policy drive of Prime Minister Modi’s government to improve transparency and expand tax base) In recent times, the government has been pushing for transparency in all aspects of economic activity and, in particular, to expand the tax base from just 1% of the population to at least 10%. Although disruptive in the short term, over a longer time frame gold should benefit from this drive, which supports the initiative to mainstream gold savings through banking and organised channels. Does policy intervention work? Gold demand data indicates that successive attempts to curb the demand for gold have proved ineffective. Restrictive import policies had a limited effect on demand. Instead, they led to increased smuggling. The volume of gold smuggled into India between 1968 and 1995 varied from 10 to 200t per year and from 2013 and 2014 – when the 80:20 rule was in effect – smuggling rose to between 350–400t. In contrast, during periods of liberalisation in the gold market demand was met primarily through official channels. Smuggling was curbed, the price differential between the domestic and international gold market narrowed, and the government earned revenue through import tariffs and domestic taxes. The evidence – including the econometric analysis outlined in Chapter 1 – suggests that policy intervention, at best, has a marginal, short-term effect. It would seem more appropriate to question whether an economically and

traditionally significant asset like gold should continue to be treated in an ad-hoc manner by successive governments. Perhaps the time is right to deliver a comprehensive gold policy for India, one which would accept India’s affinity with gold and put that affinity to work for the good of consumers, the good of the industry and the good of the economy.

Recent developments Gold Monetisation Scheme In 2015 the Indian Government launched the Gold Monetisation Scheme (GMS). The objectives of this scheme are: • To mobilise the gold held by households and institutions in the country • To provide a fillip to the gems and jewellery sector in the country by making gold available as a raw material on loan from the banks • To boost recycling and reduce India’s reliance on imports to meet domestic demand. The gold monetisation scheme deposits fall into two categories: a Short Term Bank Deposit (STBD)141 and a Medium and Long Term Government Deposit (MLTGD).142 In the GMS customers can deposit gold in any form – be that jewellery, ornaments or bars and coins – to be assayed and then credited to the appropriate account. The principal and interest on an STBD are denominated in gold. In the case of MLTGD, the redemption of the principal at maturity shall, depending on the depositor’s preference, be either in Indian Rupees equivalent to the value of gold at the time of redemption, or in gold. Where the redemption of the deposit is in gold, an administrative charge of 0.2% of the notional redemption amount in terms of Indian Rupees is applied. But the depositor does not have this flexibility when it comes to the interest; the interest accrued on MLTGD is calculated with reference to the value of gold in terms of Indian Rupees at the time of the deposit and is paid in cash.

141 STBD – Short Term Bank Deposit – The deposit of gold made under the GMS with a designated bank for a short term period of 1–3 years. 142 Medium and Long Term Government Deposit(MLTGD) – The deposit of gold made under the GMS with a designated bank in the account of the Central Government for a medium term of 5–7 years or a long term period of 12–15 years or for such period as may be decided from time to time by the Central Government.

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The scheme has had a slow start. According to the Finance Ministry, 5.7t143 of gold has been collected under the Gold Monetisation Scheme. Most of these deposits have been from temples and trusts. Nevertheless, it is worth considering what success would look like for this scheme. It is well documented that the previous Gold Deposit Scheme launched in 1999 only managed to mobilise around 15t over its lifetime. The latest scheme is still very much in its infancy: incentives and infrastructure need to be developed. In our view, if the scheme has accumulated 25–30t in the next three years, it could be considered a success. GMS-linked Gold Metal Loan (GML) scheme Introduced in late 2015, the objective of this scheme is to use the gold mobilised through the monetisation scheme to reduce imports of gold to some extent. The Reserve Bank of India specified that the gold mobilised under STBD may be provided to jewellers as GML. The designated 144 banks can also purchase the gold auctioned under MLTGD and extend GMLs to jewellers. Under this scheme, jewellers will receive physical delivery of the gold either from the refiners or from the designated bank, depending on where the refined gold is stored. Designated banks other than the nominated banks145 are eligible to import gold only for the redemption of the gold deposits mobilised under the STBD. The designated banks are free to determine the interest rate to be charged on GMS-linked GML.

Hallmarking and Assaying India’s gold industry has long been plagued by undercarating. But this might be about to change. In March 2016, the government of India received the assent of the President on the new Bureau of Indian Standards (BIS) Act 2016 (New BIS Act), which will replace the old BIS Act of 1986. The New BIS Act will be effective from 1 January 2017 in the official gazette of India. The Act has significant implications for India’s gold industry as it has provided specific empowerment to the Central Government in the following areas of standardisation for gold: • The BIS will become the national standards body of India, and the government has been empowered to make hallmarking of precious metals compulsory. This could transform the industry. For example, the government could make it compulsory that such articles are sold only through certified outlets • It also comes with legal powers. The use of a hallmark by non-accredited jewellery centres will be an offence. Retailers that violate the hallmarking rules will be liable for a fine of up to 10 times the value of the product, or imprisonment for up to two years • If hallmarking of precious metals becomes mandatory and any hallmarked jewellery is found to be of lower caratage, consumers will be able to complain via the BIS website and ask the seller for a replacement.

Jewellery shopping.

143 Correct as of 14 November. 144 According to RBI Designated Banks are All Scheduled Commercial Banks (excluding Regional Rural banks) that decide to implement the Gold Monetisation Scheme. 145 Nominated Bank: A scheduled Commercial Bank authorised by the RBI to import gold under the extant Foreign Trade Policy.

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Sovereign Gold Bond scheme Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are substitutes for holding physical gold; they are not backed by physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the Reserve Bank on behalf of the Government of India. The Bonds are denominated in multiples of gram(s) of gold with a basic unit of one gram. The tenor of the Bond is a period of eight years with an exit option from the fifth year, exercisable on the interest payment dates. The minimum permissible investment is two units (i.e. two grams of gold). The maximum amount that can be subscribed is 500 grams per person per fiscal year (April–March). The finance ministry has recently permitted listing and trading of the first tranche of gold bonds. Trading in these bonds began on 9 June 2016 on both the Bombay Stock Exchange and the National Stock Exchange.

New trade and policy forums Faced with the new gold policy framework, regulatory challenges, and the increase in smuggling in 2016, India’s bullion sector has continued to make moves to formalise its business. Most recently, the ‘Bullion Federation of India’, an industry body composed of 50 leading bullion dealers across 17 states, was created amid a groundswell of intention to conduct business in a transparent way, avoiding unaccounted money and fully complying with tax requirements and regulation. And encouragingly, the government has established an all-encompassing working group to look at the regulatory environment for gold. We are hopeful that such a centralised review of gold related regulation will yield positive results for the gold. While this is a welcome development for the industry, more can be done.

While it may appeal to institutional investors, this is unlikely to appeal to retail investors. For them, physical gold is more than just a financial return. Gold is entwined with religion and emotion. In our view, the Soverign Gold Bond Scheme is unlikely to affect physical gold demand.

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Focus: India’s latest effort to crack down on black money will have a big impact on gold demand India has a long and troubled history with black money – or unaccounted wealth - and the authorities latest scheme to combat it will have a big impact on both India’s economy and its gold demand. On the 8 November 2016, Prime Minister Narendra Modi announced that the government of India was withdrawing the legal tender status of Rs500 and Rs1,000 banknotes. About 86% of the total value of currency in circulation was suddenly removed from the financial system. While the intention of the authorities – to bring black money into the official economy – is praiseworthy, the measure is likely to squeeze economic growth in the short term, especially given the importance of cash in the grey economy. But looking further ahead, a more efficient, transparent economy will support growth and that, in turn, will support gold demand.

weigh on discretionary consumption in the short-term, and affect businesses’ investment prospects. Some sectors will be harder hit than others. Real estate transactions often involve an element of cash, so property prices are likely to falter, which may have a damaging wealth effect, further weighing on sentiment and domestic demand.

‘Demonetisation’ is not new to India but the effects of the latest move are far-reaching A total of Rs15.44 trillion (tn) – or 86% of the currency in circulation – was withdrawn from the economy following the announcement on 8 November. While Rs1000 notes have been scrapped entirely, new Rs500 notes and Rs2000 notes have been introduced. By mid-December, Rs12.44tn scrapped currency had come back into the financial system – an impressive amount, but it still represents a liquidity squeeze.146

Although gold demand faces some short-term headwinds, longer-term prospects are encouraging The cash crunch is taking its toll on gold demand in the short term. Rumours about caps on gold holdings and gold buying added fuel to the fire. And as tax authorities investigated some jewellers who had, immediately after demonetisation, created opportunities to convert old currency for fake or back-dated sales, the resultant panic ensured that even genuine gold buyers were reluctant to buy wedding jewellery. The caps on withdrawals from banks and lack of cash in ATMs meant that whatever cash was available was largely spent on essential items, in both rural and urban India. Small jewellery businesses, particularly in the rural centres, will feel the pinch until cash becomes more freely available.

This has happened before. In 1946 and 1978 the respective governments of the day executed similar measures. But the impact was less severe as high denomination notes did not account for as large a share of total currency and were not as widely held by the general public as in 2016. This time around all sections of Indian society have felt the impact, including the very poor. But it was part of a broader strategic plan, which began with the Jan Dhan ‘financial inclusion’ programme (intended to provide access to a bank account for every household). This will have eased the inertia and fear around banking transactions for many, smoothing the path towards greater acceptance of non-cash transactions. The latest move will, undoubtedly, have a significant impact on the economy in the short-term. The grey economy – which is wholly reliant on cash – accounts for nearly 83% of non-agricultural employment147 and in 2008 accounted for around 46%148 of Gross Value Added excluding agriculture. The depth of the contraction will depend on how much of the Rs15.44tn is replaced, and how quickly it happens. The liquidity squeeze from will

In the long-run, however, it should have a positive effect on economic growth. Bringing more of this economic growth into the formal sector will reduce corruption which hinders economic growth. The boost to bank deposits arising from the combination of the Jan Dhan programme and the demonetisation announcement will improve banks’ ability to lend to productive businesses, further boosting economic growth.

Together with the introduction of Goods and Services Tax, mandatory hallmarking and a massive push by organised jewellers to promote non-cash payments, business practices across the gold trade will become more transparent. This will hit the grey market and deter those seeking anonymity in order to avoid taxes. Consumers meanwhile will see the benefits of transparency in prices and purity. The organised trade will prosper as gold enters the mainstream financial system. This latest demonetisation exercise should also expand the tax base and the positive impact on public finances could generate a more benign and gold-supportive policy approach. Transparency across the value chain is necessary for gold to be mainstream. This is a historic opportunity for the industry to redefine itself and emerge stronger, domestically and globally.

146 https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=38886 147 http://laborsta.ilo.org/applv8/data/INFORMAL_ECONOMY/2012-06-Statistical%20update%20-%20v2.pdf 148 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---stat/documents/publication/wcms_234413.pdf

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Appendix 1: Methodology Writing a comprehensive report such as this is a daunting task; the sheer size, breadth and complexity of India’s gold market makes it challenging. To build as complete a picture as possible, we had to draw upon several strands of complementary research.

Field research We commissioned Metals Focus, one of the world’s leading precious metals consultancies, to undertake a comprehensive programme of field research. This involved speaking to market participants across the entire supply chain, including refiners, banks, logistic companies, manufacturers and retailers. In a six month period Metals Focus spoke to over 200 contacts across 10 states. We supplemented this with a series of roundtable discussions. We hosted events in Mumbai, New Delhi and Kochi with over 30 senior gold market participants, to test and refine the findings of the field research.

The TNS study provides insight into ‘share of mind’ and ‘latent demand’ for gold, which are measures commonly used in market research to assess the growth potential of a product or category. Share of Mind is based on the calculation used in TNS’ Conversion Model Tool, which has been used extensively across the world by over 800 brands. Put simply this is how they are measured: Share of mind = what would we expect people to invest in or purchase for each option in the competitive set149 based on their ideal preferences. Latent demand = the difference between “share of mind” and actual investment or purchase levels. When this is positive it indicates potential for growth and is a warning sign if it is negative.

Market research

Econometric analysis

We also drew upon a broad catalogue of consumer research which we have commissioned over recent years. This includes:

While the field research provides insight on how the market is structured and developing, econometric analysis provides clarity on the macroeconomic drivers of gold demand.

• ICE360º: This was a broad-based survey of jewellery consumers. This survey was conducted between August and November 2014. The survey included 6,000 rural households and 14,200 urban households

We analysed demand and supply data from 1990 through to 2015 to identify the key factors influencing investment and jewellery demand. The central insights are covered in the report, while a detailed summary can be found in the appendix.

Consumer insights The final piece of research used in the report is comprehensive proprietary consumer and market insight. People often have views on the gold market which may be dated, or not backed up by evidence. We wanted to make sure our comments on the gold market are current and evidence-based. We commissioned TNS – one of the world’s foremost consumer and market research companies – to survey 4,000 India gold consumers in early 2016. 2,000 investors and 2,000 jewellery consumers were each asked over 60 questions. The survey was split equally between urban and rural India using online (urban) and face-to-face (rural) methodology. In addition, over 30 face-to-face interviews conducted with a range of gold consumers in New Delhi and Chennai, generated supporting qualitative insights.

• Nielsen: This survey focused on the investment market. For the qualitative phase of the study, 50 interviews were conducted in 12 locations. For the quantitative phase, a total of 5,022 consumer interviews and 502 channel partner (jewellers, independent financial advisors, bank employees) interviews were conducted over a period of six months • Kadence: Between May 2013 and February 2014 we asked over 10,000 jewellery consumers about their intention to buy, price expectations and whether they had sold jewellery • Usage and attitudes study (2012): TNS conducted a survey of over 13,000 jewellery consumers in 2012. These datasets allow us to quantitatively support established views on the gold market, and uncover genuinely new insight into India’s consumer behaviour.

Gold demand data Throughout this publication we will make reference to gold demand and flows measured in fine gold content, as we do in Gold Demand Trends. Unless otherwise stated, all gold demand data used is from the World Gold Council’s data series which is reported in Gold Demand Trends.

149 Options are different for jewellery and investment. For jewellery, the competitive set includes jewellery and luxury fashion purchases (e.g. gold, platinum, silver or costume jewellery, smart phones/watches and luxury fashion). For investment, it will include gold bars and coins, gold jewellery, ETFs, stocks and shares, savings accounts etc.

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Appendix 2: Indian gold demand: an econometric analysis What drives Indian gold demand? An econometric approach

Short-term fluctuations

Gold is a global asset and is bought and sold by consumers and investors for many reasons at various times. As such, some people consider that it’s not easy to understand gold’s behaviour, but in reality it responds to the basic laws of economics and the equilibrium of supply and demand. The question is, then, what drives demand and supply in turn?

This equation deals with the annual deviations from the long-term equilibrium. In the case, ∆yt represents year-onyear changes in demand (or supply) and links fluctuations changes in x t (namely ∆ x t ), as well as possibly an additional set of variables z t , and fraction of the “error-correction term” u in the previous period ( t–1). In other words, short-term fluctuations in demand (or supply) are driven by various macro factors, but the system also mean reverts to its long-run depending on how far it deviated from equilibrium the year before. The β ’s are the short-run long elasticities and λ shows the strength of the reversion to the mean.

To answer this question from an Indian perspective, we undertook an econometric analysis using macroeconomic variables to explain the long- and short-term dynamics of demand and supply over the past two decades. Our objective was to use a quantitative approach to obtain new insights and verify if anecdotal evidence and common wisdom match reality. A brief introduction to Error Correction Models (ECMs) We often discuss that while we may see short-term changes in demand, there are long-term dynamics that drive the gold market. To understand this, we decided to use a common econometric approach to modelling called ECMs. This type of model specification allows for finding variables that explain deviations in gold demand (or supply) from its long-run equilibrium. In general terms, the model can be written in two parts: Long-run equilibrium



yt = δ 0+δx x t+u t

In this case, yt represents annual demand (or supply) for gold and the model suggests there is long-term relationship with x t ; note that x t may represent one or multiple variables; δ represents the long-term elasticity. The relationship between yt and x t deviates from its equilibrium each period by a certain amount which we denote u t (also called the error term); u t , in turn, is influenced by short-term fluctuations in macroeconomic (or other) variables.

India’s gold market: evolution and innovation



∆yt =β 0+βx ∆ x t+βz z t –λu t –1+∈t

Selecting the relevant data and historical period Using an ECM framework, we analysed the Indian gold market. Given that Indian gold production is negligible, we focused on jewellery, investment, and technology demand, as well as gold recycling from the supply side. There is annual data available for most of these series going back to 1980, but we restricted our analysis to the period from 1990 to 2015. The reason is two-fold: • Gold imports were banned until 1992 and consumers had to resort to smuggling to satisfy demand154 • Our analysis typically focuses on consumer demand, rather than fabrication. We only have consumer demand data going back to 1995. And while we use fabrication data to estimate consumer demand for the first part of the 1990s, the further back we go, the less reliable the approximation becomes. While using data since 1980 and modelling the structural shift that happened in the 1990s is possible, we believe that using the shorter period better represents the reality of the Indian market today and, as we note later, using the longer period (when applicable) delivers very similar results.

80

Modelling the long- and short-term dynamics of the Indian gold market

Table 22: Income plays an important role in driving gold demand up, while higher gold prices reduce it Summary statistic from long-term cointegrating demand relationships

Our analysis focuses on five gold demand and supply series: • Consumer demand (jewellery plus bars and coins) • Jewellery

Constant

Income

Price

Tax

Estimate

1.50

0.95

-0.47

-3.1

Standard error

0.55

0.16

0.16

1.7

2.7

6.1

-2.9

-1.8

δ0

• Bar and coins

T-stat

• Technology

R2

δ1

δ2

δ3

84.5%

• Recycling.

Source: World Gold Council

Consumer demand Our model suggests that, over the long run (ie in equilibrium), annual gold demand is driven by income150 and price – all in logs. In addition, we included a variable capturing the level of import duty on gold, which gradually increased since 2012, resulting in a small contraction in long-term demand driven by government policy. The long-run equation is given by:

When the system is in equilibrium (in other words, when there is long run stability and no deviations from exogenous shocks present or past), a 1% increase in income results in a 1% increase in demand. However, a 1% increase in price, reduces demand by 0.5%. Finally, long-term demand has fallen by three tonnes for every 1% increase in gold’s import duty.

d t=δ 0+δ1income t+δ2 price t+δ3 Itax+u t. Income is given by Gross National Income per capita and the gold price is measured in rupees. The import duty variable rose gradually from 1% prior to 2012 to 10% by 2014. Chart 42 and Table 22 show the model fit and relevant coefficient estimates.

Over the short run, the system of course deviates from the long-term equilibrium. Our model suggests that changes in annual demand are driven by inflation, shortterm price movements, excess rainfall and the level of taxes. Deviations from the long-run equilibrium also have a mean reverting effect. The equation is given by:



Δ dt=β1π t+β2 Δ pt+β3rainfall+β4tax–λu t –1.

Chart 42: Long-term Indian gold consumer demand is influenced by income and price and was suppressed by government import restrictions Annual gold demand (in tonnes) from 1990 to 2015 Tonnes 1,200 1,000 800 600 400 200 0 -200 -400 1990

1994

1998

Consumer demand

2002 Fitted

2006

2010

2014

Residual

Source: Metals Focus; World Gold Council

150 We additionally tested the long-term relationship between gold demand and the level of consumer prices (primarily driven by agricultural prices in India) which was statistically significant. Unless there is deflation, consumer prices typically grow and so does gold demand. Consumer prices are themselves driven by income, availability and demand. We chose to use income as the explanatory variable as it gave an equivalently good fit and is more intuitive to explain long-run (and future) dynamics as there is more information about expectations of household income growth.

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Δ d denotes year-on-year (yoy) changes in demand, π inflation, Δ p yoy changes in the rupee gold price, and

rainfall is given by the excess rainfall relative to the long-term average since 1900; import taxes are assumed fixed prior to 2012 and then increasing as the government policy changed.151 Chart 43 and Table 23 show the short-term model fit and relevant coefficient estimates and other statistics. Chart 43: In the short-run, gold demand responds to inflation, price, rainfall and the level of taxes YoY changes in gold demand from 1991 to 2015 Growth % 60

in other words, the macroeconomic variables used offer a good guide to know the direction annual demand will take even if the magnitude estimate is slightly off. Jewellery Consumer demand is primarily driven by jewellery, which makes up 75% of Indian annual demand.152 As such, it is not surprising that our analysis resulted in a very similar model. Namely, the long-run equation is given by:

d t=δ 0+δ1income t+δ2 price t+δ3 Itax+u t. Given the similarities, we summarise in Table 24 the jewellery coefficient estimates. Table 24: Long-term jewellery demand responds to income, price and import restrictions Summary statistic from long-term cointegrating demand relationships

50 40 30 20 10

Constant

Income

Price

80:20 rule

δ0

0

δ1

δ2

δ3

-10

Estimate

2.65

1.02

-0.69

-1.67

-20

Standard error

0.50

0.15

0.15

1.56

-30 1991

T-stat

5.2

7.1

-4.6

-1.1

1995

1999

Consumer demand

2003 Fitted

2007

2011

2015

Residual

Table 23: Higher inflation and more rain result in higher annual consumer demand, higher prices and taxes lower it Summary statistic from short-term demand dynamics ECV

Inflation

Price

Rainfall

Tax

Estimate Standard error

-0.56

2.56

-0.90

0.48

0.48

0.16

0.52

0.26

0.31

0.31

T-stat

-3.51

4.92

-3.53

1.56

1.56

R2

66.7%

= direction

84.0%

β1

β2

81.7%

Source: World Gold Council

Source: Metals Focus; World Gold Council

-λ

R2

β3

β4

Source: World Gold Council

In the short run (in this case, a year), a 1% consumer price inflation pushes gold demand up by 2.6%; an additional 1% of rain during the Monsoon season, increased demand by 0.5%. Conversely, a 1% increase in price, reduces short-term demand by 0.9% and, holding everything else constant, higher taxes since 2012 have reduced gold demand by 1.9%. Finally, lower than average demand in a given year, lifts demand up the subsequent year. Notably, while the R2 is a respectable 67%, the model gets the direction of demand growth close to 84% of the time –

The interpretation is quite similar to consumer demand, except that, jewellery is more responsive to the gold price and the rising import duty had less of a dampening effect (in fact, its effect was not very significant statistically speaking). The jewellery short-run equation is also given by:



Δ dt=Δ 1π t+β2 Δ pt+β3rainfall+β4tax–λu t –1.

Table 25 summarises the relevant estimates and statistics. Table 25: Higher inflation and more rain result in higher annual jewellery demand, higher prices and taxes lower it Summary statistic from short-term demand dynamics ECV

Inflation

Price

Rainfall

Tax

-0.51

2.42

-1.03

0.36

-1.36

-λ

Estimate Standard error T-stat

β1

β2

β3

β4

0.16

0.50

0.25

0.29

0.92

-3.10

4.83

-4.16

1.23

-1.47

R2

64.1%

= direction

84.0%

Source: World Gold Council

151 While taxes were not exactly fixed before 2013, gold price premium data indicates that little of those changes were passed to the consumers and so, we assumed, little fluctuations would have a small impact in consumer demand. 152 This corresponds to the 26-year average ending in 2015.

India’s gold market: evolution and innovation

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Investment We define investment demand as annual purchases of bars and coins. While there are some similarities to the drivers of jewellery demand, there are also some notable differences which we explore here. Our model suggests that, over the long run (i.e in equilibrium), annual bar and coin demand is primarily driven by income153 and not price. In addition, higher import duties have taken a more significant toll on investment demand. The long-run investment equation is given by:

dt=δ 0+δ1income t+δ2 Itax+u t .

purchases are made, additional income may go to long-term savings in the form of bars and coins irrespective of price; second, for investment purposes, higher prices may be an indication of momentum which counteracts the dampening force typically found in ‘normal’ (and ‘superior’) economic goods. Finally, higher import duties have had a larger impact on bar and coin demand than they did for jewellery, reducing demand by 9.5t for every percentage point increase. This finding supports the hypothesis that the main gold demand is in jewellery with bars and coins being supplementary. Over the short run, just like in jewellery, our model suggests that changes in annual bar and coin demand are driven by inflation, short-term price movements, excess rainfall and the level of taxes. Deviations from the long-run equilibrium also have a mean reverting effect. The equation is given by:

Chart 44 and Table 26 summarise the results. Chart 44: Long-term Indian bar and coin demand is driven by income – not price, and it was suppressed by government import restrictions Annual gold demand (in tonnes) from 1990 to 2015



Tonnes 400

Δ d t=β1π t+β 2 Δ pt+β 3rainfall+β4tax–λu t –1.

Chart 45 and Table 27 show the relevant results.

300

Chart 45: In the short run, inflation, price, rainfall and prices play a part YoY changes in gold demand from 1991 to 2015

200 100

Growth % 250

0 -100

200 150

-200 1990

1994

1998

Investment demand

2002 Fitted

2006

2010

2014

100

Residual

50

Source: Metals Focus; World Gold Council

0

Table 26: Income growth pushes bar and coin demand up, but prices do not have a statistically significant influence in the long run Summary statistic from long-term cointegrating demand relationships Constant

Income

Price

-6.54

1.12

-9.53

δ0

Estimate

δ1

δ2

Standard error

1.09

0.11

3.36

T-stat

-6.0

10.1

-2.8

R2

-50 -100 1991

1995

1999

Investment demand

Fitted

2007

2011

2015

Residual

Source: Metals Focus; World Gold Council

Table 27: Inflation, taxes and rainfall weigh more on bar and coins than they do on jewellery, price weighs less Summary statistic from short-term demand dynamics

83.9%

ECV

Inflation

Rainfall

Tax

Price

-0.70

4.41

0.80

-4.47

-0.88

0.13

0.91

0.54

1.72

0.44

-5.42

4.85

1.49

-2.60

-2.02

-λ

Source: World Gold Council

In equilibrium, a 1% growth in income moves long-term bar and coin demand by 1.1%. Price is not a significant driver of investment in the long run. We believe the reason for this is two-fold: first, in India, bar and coin demand is complementary to jewellery, as such, once jewellery

2003

Estimate Standard error T-stat R2

76.8%

= direction

76.0%

β1

β2

β3

β4

Source: World Gold Council

153 Similarly to consumer demand and jewellery, using the level of consumer prices results in an equivalently reliable model. We also chose to use income for its economic simplicity.

India’s gold market: evolution and innovation

83

In the short run, investment demand responds more strongly to inflation, rainfall, and taxes than jewellery does, and conversely price has a lesser (but statistically significant) effect. Bar and coin demand grows by 4.4% for every additional 1% in inflation, and 0.8% for a 1% excess rainfall during the Monsoon. Conversely, a 1% increase in price, reduces short-term investment demand by 0.9% and, holding everything else constant, higher taxes since 2012 have reduced gold demand by 4.5%. Investment demand also mean-reverts faster than jewellery – as seen by a higher λ. The model explains 77% of the variability and equally correctly estimates the direction of demand growth 76% of the time – less often than for jewellery, but a high proportion of time nonetheless. Technology Gold demand for electronics, dentistry and other uses is relatively small in India, adding between 10 and 20 tonnes to total annual demand. Still, our analysis was able to capture some interesting dynamics and insights. On the long run, technology demand is linked to Indian GDP and the gold price. It was also affected by the 80:20 gold import rule (in place between 2012 and 2014),154 as well as by the import ban pre-1992. The long-run equation is given by:

d t=δ 0+δ1GDPt+δ2 p t+δ3 I 80:20+δ 4 I1992+u t . Chart 46: Long-term Indian technology demand is driven by economic growth, price, and it was heavily influenced by import restrictions Annual gold demand (in tonnes) from 1990 to 2015 Tonnes 35 30

Constant

GDP

Price

1990s ban

80:20 rule

Estimate

3.47

1.03

-1.11

-1.91

-0.33

Standard error

0.84

0.24

0.23

0.22

0.27

4.3

4.2

-4.6

-8.5

-1.2

δ0

T-stat R2

δ1

δ2

δ3

δ4

87.0%

Source: World Gold Council

Chart 46 and Table 28 summarise the results. In the long-run, a 1% increase in national GDP leads to a 1% increase in Indian technology demand for gold. However, technology demand is quite sensitive to the gold price, and a 1% increase pushes demand down by 1.1%. Similarly, import restrictions affect demand substantially. The pre 1992 ban suppressed long-run demand by two tonnes per year and the 80:20 import rule decreased demand by 0.3t. Over the short run, a few additional variables appear: there is a persistency in technology demand (momentum) and past GDP also influences short-term deviations. In addition, a substitution effect between copper and gold becomes apparent. The equation is given by:

Δ d t=β1 Δ d t –1+β2 Δincome t+β3 ΔGDPt –1+β4 spread–λu t –1. Chart 47: Past demand and GDP growth influence technology demand, so does income, the gold price, and the price differential between copper and gold YoY changes in gold demand from 1991 to 2015 Growth % 250

25 20

200

15 10

150

5 0

100

-5

50

-10 -15 1990

Table 28: Economic growth is counterbalanced by prices and import restrictions in determining long-term technology demand Summary statistic from long-term cointegrating demand relationships

1994

1998

Technology demand

2002 Fitted

Source: Metals Focus; World Gold Council

2006

2010 Residual

2014

0 -50 1991

1995

1999

Technology demand

2003 Fitted

2007

2011

2015

Residual

Source: Metals Focus; World Gold Council

154 The 80:20 rule was an import restriction rule imposed by India where importers were required to export 20% of imports in the form of jewellery. The rule came into effect on 22 July 2013 and was removed on 28 November 2014.

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Chart 48: Recycling is influenced by price, jewellery demand and economic growth YoY changes in gold demand from 1991 to 2015

Table 29: Income growth and demand momentum push short term technology demand up, while substitution and rising inventories push it down Summary statistic from short-term demand dynamics ECV

Techt –1

Income

GDP t –1

Spread

-0.91

0.17

2.65

-1.16

-0.05

0.19

0.13

1.05

0.48

0.03

-4.67

1.33

2.53

-2.39

-1.51

-λ

Estimate Standard error T-stat R2

66.9%

= direction

68.0%

β1

β2

β3

β5

Source: World Gold Council

Growth % 100 80 60 40 20 0 -20 -40

Chart 47 and Table 29 show the relevant results. Over the short run, technology demand displays some momentum. A 1% increase in the previous year demand, pushes demand up 0.2%; a 1% increase in income lifts demand by 2.6%. Conversely, past GDP pushes demand down by 1.1% – this implies that manufacturers may over stock on good years and cool down demand the following year. In addition, a widening of the spread between the copper and gold prices reduces demand by 0.05% as a substitution effect kicks in. Finally, technology demand mean reverts rapidly, as λ is approximately 0.9. The model explains 67% of the variability and equally correctly estimates the direction of demand growth 68% of the time. Recycling Once the import ban was lifted in the 1990s, gold recycling has experienced variability, but has not displayed a marked trend like other aspects of demand do. In some sense, this would imply that Indian gold recycling is fairly consistent – approximately 90 tonnes – over the long run.155 However, there are variables that affect their annual changes. Thus, we focused our analysis on short-term dynamics. There we found that recycling is positively correlated to price, and inversely correlated to price and GDP growth. The short-run equation is given by:



Δ rt=β1 Δ p t+β2 Δd t jwlry+β3 ΔGDPt+β4 ΔGDPt –1.

The results are summarised in Chart 48 and Table 30.

-60 1991

1995

1999

2003

Recycling growth

2007

Fitted

2011

2015

Residual

Source: Metals Focus; World Gold Council

Table 30: Higher prices result in more recycling, but stronger growth and jewellery demand have the opposite effect Summary statistic from short-term recycling dynamics Price

Jewellery

GDP

GDP t –1

0.73

-0.39

-0.47

-0.49

β1

Estimate

β2

β3

β4

Standard error

0.37

0.30

0.47

0.48

T-stat

2.22

-1.29

-0.99

-1.01

R2

32.5%

= direction

68.0%

Source: World Gold Council

In the short run, quite intuitively, a 1% increase in prices pushes recycling up by 0.7%. Conversely, GDP positive growth in the same year and the previous one push recycling down by 0.6% each. In addition, a 1% increase in jewellery demand pushes recycling down by 0.4%. In other words, recycling seems to respond to the opposite forces jewellery demand does – which makes sense as it is the reverse mechanism. This model is not as robust (or statistically significant) as the models we found for the different aspects of demand. Yet, while it explains less of the variability than the demand models do, it nonetheless estimates the right direction of the change in recycling at least two thirds of the time.

155 In statistical terms, we would say that annual recycling appears to be stationary – but not constant.

India’s gold market: evolution and innovation

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Appendix 3: India’s above ground stocks The level of India's above-ground stock of gold is keenly debated. Estimates vary between 15,000–25,000t. This broad range is not surprising. Making an estimate is a notoriously difficult exercise.

flows and round-tripping. Recycling estimates were stresstested to arrive at a robust estimate. The data imply that private households and individuals are responsible for around 22,500t of gold holdings.

But it is important for the industry to have an estimate in which it can have confidence. We have taken a closer look at India’s gold flows to come up with a credible estimate.

Religious institutions It is well documented that households often gift gold to temples, churches and other religious institutions. Indian temples are among the richest in the world, some receiving donations valued at billions of Rupees. Given the strong religious ties in India and the affinity towards gold, it is not surprising that temples receive donations of bullion and ornaments.

Methodology An accurate assessment of Indian gold holdings requires an estimate of historical purchases of gold. It is important to be clear that this estimate does not include the volume of gold that may be in the supply chain at any given time. We assessed the household stock of gold from the accumulation of annual flows; essentially the sum of annual net retail investment and jewellery consumption less jewellery recycling. This allowed us to form an estimate of the household stocks of jewellery and bars and coins.

India’s gold holdings Indian gold holdings can be divided into three distinct categories: • private households • religious institutions • financial institutions Private households Households are by far the largest holders of gold in India, and have a long tradition of buying gold, stretching back several centuries. Using an historical GFMS report from 1968 as a starting point, we built a picture of jewellery, bar and coin consumption. Annual data for gold imports, fabrication, consumption and recycling allowed us to derive the net addition to stocks of gold held by Indian households. Allowances were made for hand-carried cross-border

But such holdings are not transparent; there are no data available detailing the amount of gold held by temples. And they are quite fragmented: we know there are more than 700 “popular” temples, with many thousands of far smaller ones across the country. While religious institutions’ gold is distinct from private ownership, developing an accurate picture of India’s total stock of gold means we need to subtract it from the estimate of private household ownership of gold; temples do not buy gold themselves, a large portion of it is given by worshippers. But not all of it is given by worshipers. Some of religious institutions gold was accrued before 1968, the starting point for our household estimate, and was donated by princely states.156 This adds a significant margin of error to any estimate for India’s stock of gold, which include religious institutions’ holdings. Some of the larger and wealthier temples are known to have large holdings of gold. The Padmanabha Swamy Temple, for example, was recently found to have an estimated Rs1.2tn in precious metals, stones and ornaments in five vaults. And there are many other temples with significant annual levels of income and enormous volumes of annual visitors: Tirupati Balaji receives around Rs6.5bn worth of donations per year, while Vaishno Devi welcomes eight million visitors each year, many of whom will make a donation.

156 A princely state was a nominally sovereign monarchy under a local or regional ruler. Their history goes back as far as 5th century BC. https://en.wikipedia.org/wiki/Princely_state#cite_note-1

India’s gold market: evolution and innovation

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Based on income levels and visitor numbers, some assumptions regarding the proportion of donations made in gold and the number of temples around the country, our broad estimate is that temples in India may hold between 2,000– 4,000t. Our guess is that 1,000t might have been accrued before 1968, which means between 1,000t and 3,000t was given to religious institutions by private individuals.

One might be tempted to include holdings of gold by loan companies and banks, but to do so would be double counting: the gold is pledged as security, therefore the ownership lies with the household.

But as previously mentioned, this should not be added to India’s total stock of gold. Temples’ gold is largely gifted from individuals and households and will already be accounted for by the analysis undertaken on private households.

Glossary

The Reserve Bank of India’s holdings are also transparent. According to its latest figures it holds 558t, accounting for around 5% of its total foreign exchange reserves.157

For a glossary of terms used in this report, please see: www.gold.org/research/india-gold-market/glossary

Financial institutions and government These are two of the most transparent parts of the market to assess. A good indication of financial gold stocks is provided by ETF holdings. As of end-August 2016, these amounted to 23t.

157 IMF, RBI.

India’s gold market: evolution and innovation

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India’s gold market: evolution and innovation

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