For the past half year, Smita Nair has been investing Rs 1,000 every month in a gold scheme run by a local jeweller. In return, she will get Rs 13,000 after 12 months. On paper, it appears the jeweller is worse off from the deal, but in reality, he is simply exploiting the psychology of customers like Nair. The jeweller gets funds cheap to expand his business. Nair will get returns of less than six per cent - even a Post Office recurring deposit scheme offers more.
Gold jewellery holds a sentimental value for Indians and they continue to buy it. Although consumption fell 34 per cent in value terms during the April-June 2012 quarter after the import duty was hiked from two to four per cent, demand picked up in the July-September 2012 quarter. In value terms, consumer demand for
gold rose six per cent to $11,850 million in the quarter ended September 2012 from $11,208 million during the corresponding period last year.
Now, the government plans to raise the import duty on gold further, to six per cent. The measure is aimed at lowering India's current account deficit - the excess of total imports of goods and services over exports. However, it is unlikely to have much of an impact on demand, say market experts. "It is a short-term solution. In the medium- to long-term, consumers will come back. For Indians, gold is a safe haven," says Renisha Chainani, a commodity analyst for retail capital markets at Edelweiss Financial Services.
Others believe the government needs to find ways to convert investment demand into paper assets. "It is time the government thinks about introducing gold products to Indian consumers without actual physical gold being the underlying asset," says Nilesh Shah, a director at Axis Direct. In the past, attempts to attract idle gold have come a cropper as consumers aren't willing to convert jewellery into gold bars because of its sentimental value. Moreover, the returns given on such investments were negligible. Consumers used to receive just one per cent interest on the total value of the gold.
"The lack of financial inclusion and failure of the
RBI to provide access to bank accounts is another reason gold is still the preferred investment over financial assets," says a senior official with one of India's leading private sector banks. Gold, he adds, is a convenient form of investment for poor people and those living in rural regions. Most wear at least a single piece of gold jewellery because they have no fear about theft or erosion, unlike with cash in their homes.
Besides, as long as people get lucrative returns from gold, investors won't mind paying a
higher import duty. Gold has offered 22 per cent average
returns per year in the last five years. Demand will drop only when the returns are in single digits - something that expert feels is a likely possibility this year. Even if that happens, Smita Nair and others like her will continue buying gold with an eye on the future. Despite getting poor returns from the jeweller, she will come out ahead in time, as the worth of her asset will only increase.
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