Behind the fall in India's gold imports

India's gold imports dropped 30 per cent in value terms in the first half of 2012/13, much to the disappointment of the gold industry. That decline has raised some eyebrows, given that India is the world's largest buyer of bullion. Indeed, after oil, gold is the biggest item of import.

The Finance Ministry, however, will be pleased.

It is well-known that the government hiked the import duty on gold earlier this year more to curb inflows than earn revenues. When he was finance minister, Pranab Mukherjee increased the basic customs duty on standard gold bars to 4 per cent, and on non-standard gold to 10 per cent.

Six months on, the effect of that measure is there for all to see. Gold imports declined to $20.2 billion as of September 30 from $29 billion during the first half of last year. Over the whole of last year, India imported $56.2 billion worth of gold.

Pundits in the trade say the government is trying to rein in imports and cut dollar outflows to manage the trade deficit.

However, restricting gold imports could only lead to smuggling, warn traders.

About 40 per cent of the world's annual gold production is consumed by India and China. In calendar year 2012, India's gold imports are expected to lie in the region of 800 tonnes, compared to 1,000 tonnes last year. Globally, demand for gold is likely to drop 5-7 per cent in 2012 to about 4,100 tonnes, according to analysts.

The attraction for gold is driven by its rising value. The Reserve Bank of India is increasing its reserves as is the US Federal Reserve. India currently has about 20,000 tonnes of gold in all forms: jewellery, bars, coins etc.

"The amount of gold under pledge is about 800 tonnes. There is a good amount of gold stock available in India, which can be converted into money by pledge or by exporting," says P.E. Mathai, CEO of Muthoot Precious Metals Corporation, and a veteran banker.

His firm imports gold from Switzerland, makes coins in weight denominations ranging from 0.5 gm to 50 gm, and sells them through the retail market.

Gold loan firms such as Muthoot Finance, Manappuram Finance and Muthoot Fincorp will not cheer any decline in gold inflows. They would want the yellow metal's inflows to keep on rising and drive the growth of the gold-loan segment.

"When the whole world is looking at gold as an option of investment, India cannot be an exception. The ratings on India have been positive, and from the next quarter, we should see some growth leading to higher retail buying in gold," says Ganesh Narayan, Executive Director at C. Krishniah Chetty & Sons, a 140-year-old jewellery retailer in Bangalore.

Some analysts attribute the drop in imports to the lack in appetite for gold at current price levels. They say sedate demand also affected other consumer segments during the first half of the year.

Demand is expected to bounce back once the economy picks up and people get more money in their hands.

"Diwali sales of gold have been pretty good this year," says Narayan. He sees this continuing until the wedding season ends in the middle of January.

Analysts believe the fall in demand during the first half was due to the slowdown in the economy and record-high gold prices (in rupee terms).

At 11.30 am on December 4, actively traded gold for December delivery was 0.31 per cent lower, at Rs 31,165 per 10 grams, on the Multi Commodity Exchange (MCX).