Demonetisation lowers India's gold demand to 7-year low in 2016

India's gold demand fell by 15% to $27.2 billion in calendar 2016 from $32 billion in 2015

India’s gold demand has fallen to a seven-year low in 2016 and a sharp decline in smuggling post demonetisation has aided the trend.

Data compiled by the global miners’ body World Gold Council (WGC) showed India’s gold demand at 675.5 tonnes in 2016, 21.2 per cent lower than 857.2 tonnes in the previous year. Demand by value declined 15 per cent to $27.2 billion in 2016 from $32 billion a year ago. 

The decline follows several government initiatives to discourage consumers from buying gold. The government last year strengthened the know-your-customer rules by imposing a limit on anonymous cash purchases to Rs 200,000. Finance Minister Arun Jaitley capped all cash transactions at Rs 300,000 in this week’s Union Budget. Jewellers said this would hurt rural demand. 

“Gold demand was affected as the industry faced a number of challenges in transitioning to a transparent system – be it the PAN (permanent account number) requirement, excise duty on jewellery, demonetisation or the publicity around income disclosure schemes. This was not unique to gold, but trade practices and embedded buying behavior created short-term headwinds,” said Somasundaram PR, managing director (India), World Gold Council.

Jewellery demand slumped by 22.4 per cent to 514 tonnes in 2016 from 662.3 tonnes in 2015 and investment demand fell 17 per cent to 161.5 tonnes in 2016 from 194.9 tonnes in 2015. 

Global gold demand moved up two per cent to 4,309 tonnes in 2016 from 4,216 tonnes in 2015 on a sharp increase in exchange traded fund (ETF) inflows. Central bank demand for gold slumped 33 per cent to 384 tonnes in 2016 from 577 tonnes in 2015.

“We anticipate that 2017 will see a demand range of 650-750 tonnes due to the introduction of the goods and services tax (GST) coupled with gradual adaptation to previous policy changes,” Somasundaram said.

The share of smuggled gold has declined to 17 per cent in 2016 from 20 per cent in 2015 due to the liquidity crisis following demonetisation of high-value currency notes in November.

“Long-term prospects look bullish for gold demand in India with an average 850-950 tonnes. For gold to remain in the financial system, the government needs to keep the GST rate (along with the import duty) substantially lower than the prevailing duty of around 13 per cent. The government should also incentivise investors in ETFs,” said Somasundaram.

India’s gold imports declined 39 per cent to 648.3 tonnes in 2016 from 1,065 tonnes in the previous year, WGC data showed. Unrefined gold (dore) imports were 141.9 tonnes in 2016 against 229 tonnes in 2015. Gold recovered from scrap rose 12 per cent to 89.6 tonnes in 2016 from 80.2 tonnes in the previous year.