Chennai: Despite the long-term prospects, gold demand in India is facing short-term challenges from lower household savings, financial inclusion, alternate investment avenues and relatively benign inflation.
Decreasing household savings is a challenge for gold demand in the shor- term. From the 1960s until 2010, the Indian savings rate climbed from 6 per cent to 34.3 per cent. Since then, savings as a percentage of GDP have declined, dipping below 30 per cent in 2018 and inching lower. Indians are spending more on goods and services, such as smartphones, designer clothes and travel.
Financial inclusion and financial literacy, while beneficial for India’s prosperity and income equality, have created challenges for the gold market. These are particularly evident in rural areas, where physical assets, including gold, have long been considered the preferred form of investment.
There has been growing interest in equities too. The number of demat accounts almost tripled from 16.7 million in 2009 to 49.8 million by the end of 2020.
The money flowing into equities via systematic investment plans (SIP) has also surged in recent years, reflecting growing awareness of mutual fund investment. Average inflows to SIPs more than doubled between 2016 and 2020 from Rs 3,500 crore to Rs 8,100 crore per month.
Usually inflation spurs interest in gold. In India, inflation has regularly spiked above 10 per cent over the past four decades, imposing pressure on the economy. Between 2014 and 2020, however, average retail inflation remained relatively benign below 5 per cent.
Agricultural wages are still in decline, despite government actions in recent years. This too would curtail rural demand for gold.
However, in the long-term, increasing income levels is a positive for gold demand....