Looking longer term, the Indian gold market is influenced by both positive and negative factors. On the upside, the economy is expected to benefit from several robust structural factors.
First, rapid growth in the working age population over the next two decades will create a strong and sustained demographic dividend second, continued urbanisation will drive and support economic expansion. Third, higher penetration of both the manufacturing and services sectors in rural areas will reduce their reliance on agriculture and deliver more stable incomes for millions of households.
As our econometric model illustrates, rising incomes are one of the biggest single drivers of long-term gold demand. This suggests that, as India’s economy grows, demand for gold should increase. However, the Indian gold market also faces several challenges.
Households are saving proportionately less than they used to, which may reduce the amount of capital they allocate to gold Financial inclusion is increasing, which provides investors with other sources for their savings beyond physical gold Government policies can impact demand and inadvertently foster India’s unofficial market Agricultural wages are still in decline, despite government actions in recent years.
Taking all these factors into consideration, it would seem that the gold market is at a crossroads. Government plans to increase farmers’ income should boost rural wages, lending further support to the market. Should the government choose to impose further tax increases, import restrictions or other adverse policies relating to gold, demand could be stifled or driven underground.
Looking ahead, it would appear that India’s gold market is most likely to benefit from positive demographic and socio-economic changes if the industry takes steps to become more transparent, more standardised and more in line with global peers. The social and cultural transformations taking place in India should be underpinned by concerted efforts to provide easy access, and improve integrity and fungibility to reinforce trust in gold as an asset.
Such moves would increase trust, boost confidence and allow the gold market to truly capitalise on India’s growing wealth. A more robust market would encourage Indian consumers and investors to see value in gold even as they become wealthier and more sophisticated. Overseas, a more reliable market would foster demand for Indian gold products the world over and allow India to take its rightful place on the global gold stage.