India’s Gold Imports Have Doubled

Syllabus: GS3/Economy

Context

• Gold imports more than doubled in August to a record high of USD 10.06 billion, according to the Commerce Ministry data.
  • It is mainly on account of a drastic cut in customs duty and ongoing festive demand.

Gold Import of India

• Gold accounts for over 5 percent of the country’s total imports. 
• India is the world’s second-biggest gold consumer after China. 
• The imports mainly take care of the demand by the jewellery industry.
• Switzerland is the largest source of gold imports, with about 40 percent share, followed by the UAE (over 16 percent) and South Africa (about 10 percent).
• India’s gold imports, which have a bearing on the country’s current account deficit (CAD), dipped by 4.23 percent during April-July 2024-25.
  • In the Budget 2024, the government slashed the import duty from 15 percent to 6 percent.

Factors Influencing Gold prices:

• Supply and Demand: The availability of gold and the demand for it, both for investment and industrial use, directly impact prices.
  • Increased mining output can lower prices, while high demand can raise them.
• Inflation: Gold is often seen as a hedge against inflation. When inflation rises, investors flock to gold to preserve their purchasing power, driving up prices.
• Interest Rates: Lower interest rates decrease the opportunity cost of holding gold, making it more attractive to investors. Conversely, higher rates lead to lower gold prices.
• Geopolitical Stability: Political uncertainty or conflict lead investors to seek safety in gold, boosting demand and prices.
• Currency Strength: Gold is typically priced in U.S. dollars. A weaker dollar makes gold cheaper for holders of other currencies, potentially increasing demand and prices.
• Central Bank Policies: Actions by central banks, such as gold purchases or sales, significantly influence market prices. Central banks often hold gold as part of their reserves.
• Global Economic Conditions: Economic downturns or uncertainties lead to increased demand for gold as a safe haven.

Impact of high Gold Imports

• Trade Balance: Increased gold imports worsen a country’s trade balance, leading to a larger trade deficit if exports do not compensate. This can put pressure on the national currency.
• Currency Value: A high level of gold imports can lead to depreciation of the domestic currency, as demand for foreign currency rises to pay for imports.
• Inflation: If gold is being imported as a hedge against inflation, its rising demand can contribute to inflationary pressures in the economy.
• Investment Flow: High gold imports may indicate strong investor confidence in gold as a safe asset, which can attract more foreign investments in the long run.
• Resource Allocation: Large gold imports might divert financial resources from other sectors, impacting overall economic growth.

Gems and Jewellery Industry in India

• In April-June 2024, India’s gems and jewellery exports were at US$ 6.87 billion. 
• Cut and polished diamonds accounted for the highest share of exports (53.47%), followed by gold jewellery (32.39%) and silver jewellery (3.36%).
• The exports of gold jewellery stood at US$ 608.01 million whereas the imports of gold jewellery stood at US$ 88.61 million in June 2024.
• Major Hubs for Gems and Jewellery are: Surat, Mumbai, Jaipur, Thrichor Nellore, Delhi, Hyderabad and Kolkata. 
• India’s gems & jewellery exports are expected to reach US$ 100 billion by 2027.
• Based on its potential for growth and value addition, the Government declared the gems and jewellery sector as a focus area for export promotion.

Source: IE