Hungry for gold

With an average economic growth rate of 7.2 percent over the past five years, India’s demand for gold has risen significantly. India is the world’s largest consumer of this precious metal, and whilst India was once a prominent player in gold mining production during the 1850s, rising costs, and dwindling resources mean that most of India’s gold mines closed in the twentieth century. Importing between 800 and 1,000 tonnes of gold annually, large gold imports today account for almost a third of India’s trade deficit. As a result, the Modi government is exploring various options to decrease this deficit, including implementing financial schemes to lure Indians away from buying physical gold and increasing the country’s domestic supply through the revival of the local mining industry. 

Though gold is viewed as an attractive metal around the world, India’s appetite for it is insatiable. Despite fluctuating gold prices, many Indians reportedly consider gold to be a sound investment and form of financial security as it can be resold during difficult economic times. It is also viewed as a status symbol and is frequently displayed at weddings and social events. Numerous temples house millions of US dollars’ worth of gold, as wealthy Hindus regularly donate gold jewellery, coins, bars, and ornaments to temples. An estimated 3,000 tonnes, more than two-thirds of the gold held in the US bullion depository at Fort Knox, is currently stored in India’s temples. 

Successive governments have attempted to kerb India’s appetite for gold. Recently, in September 2015, the Modi administration introduced a gold monetisation scheme (GMS) and sovereign bond financial plan to reduce the consumption of this precious metal. These initiatives form part of the government’s plan to recycle gold for productive use, ween people away from investing in physical gold, and reduce costly imports. The GMS, which is essentially a fixed deposit scheme, allows individuals and temples to open a ‘gold savings account’ through which they can deposit their physical gold assets and earn interest on the assessed value of their bullion or jewellery. The sovereign gold bond (SGB), on the other hand, targets those individuals who purchase gold bars as an investment asset. It is estimated that Indians buy 300 tonnes of gold bars every year. The objective of the SGB is, therefore, to dematerialise the gold so that investors are indifferent as to whether their assets are held as physical gold or bonds simply linked to the gold price. Ultimately, the bonds have the same benefits as gold, can be used as collateral for loans, and can be sold or traded on stock exchanges in a dematerialised form. While there has been significant hype over this gold monetisation plan, the failure of a similar scheme in 1999, due in part to low financial interest rates, raises doubts as to whether it will be successful. 

Aside from financial schemes, the government also plans to increase the country’s domestic supply of gold. The Ministry of Mines wants to revive India’s mining industry to reduce its gold import bill as India currently produces less than two tonnes of gold per year and reportedly has only one working mine. According to the government, within a few months, an estimated 80 old mining tenements will be auctioned off to local and foreign companies that can renovate the old mines and provide the necessary equipment for them to operate safely again. In addition to auctioning off old mines, the Ministry of Mines is pushing to revive the Kolar Gold Fields (KGF) in the southern state of Karnataka. The KGF, once a hub of gold mining activity, was closed in 2001 due to increasing losses and depleting reserves. However, the government is now looking to re-work Kolar’s hills as a state assessment has indicated that an estimated £2.5 billion ($3.9 billion) worth of gold is believed to be housed in the region. Because reopening one of the world’s most famous gold mining districts after 15 years would require a substantial amount of investment, there is much uncertainty as to whether the abandoned and neglected mines can actually be revived. Indeed, the reopening has been touted by numerous governments several times but has failed given legal hurdles over ownership. 

In light of these concerns, coupled with the mining sector’s reputation for not only having tedious license and permit processes but for extensive fraud and corruption, there are doubts as to whether India will be able to successfully revive its gold mining industry. Furthermore, while the gold monetisation plan is promoted as a way for Indians to be savvy with their gold assets, possessing physical gold is traditionally ingrained in Indian society. Thus, unless interest rates are very attractive, it may prove to be challenging to encourage Indian’s to part with their gold assets and ultimately decrease the trade deficit.