Cash ban hits India’s gold demand

Business Tuesday 31/January/2017 18:58 PM
By: Times News Service
Cash ban hits India’s gold demand

Mumbai: A self-imposed cash shortage in India is creating chaos for jewelry retailers in one of the world’s biggest gold-buying countries. Sales are plunging. Just ask Renita Ferreira.
While her February 24 marriage ceremony has been set for a year, she and her fiance have not bought wedding rings, even after many trips to stores in Panaji, the capital of the western state of Goa. A majority of retailers are not equipped to accept credit cards because India’s jewelry industry runs mostly on cash, something consumers have a lot less of these days.
In November, the government banned what amounts to half the circulated cash, part of a plan to curb corruption and tax evasion. The move cut purchases of everything from cars to soap in a country where 98 per cent of consumer payments are in rupee notes. While a replacement currency was issued, the disruption further eroded gold demand already slowed by higher retail costs.
“All our plans went for a toss after the demonetisation,” said Ferreira, 28, a marketing consultant. “Cash is just not an option now. We cannot get married without rings.”
Gold demand
Gold demand in India, which trails only China, probably tumbled to a seven-year low in 2016, according to the World Gold Council, which has cut its forecasts twice. The council pegged consumption at 650 to 750 metric tonnes, down as much as 24 per cent from 858.1 tonnes in 2015. The decline will continue in 2017, based on slowing imports that account for much of what the country buys, said Kotak Mahindra Bank Ltd. Purchases of foreign bullion will be 350 to 400 tonnes, down from 575 tonnes last year, the bank said. Indians already were buying less gold before Prime Minister Narendra Modi enacted the world’s most-sweeping currency policy change in decades.
Higher prices had kept many consumers away, and rural demand fell off when a weak monsoon season eroded farm income. Jewelers also went on strike to protest an excise tax on locally manufactured jewelry and the government’s push for greater transparency in the financial system.
Conditions for bullion weakened further after the government invalidated old 500- and 1,000-rupee notes ($7-$15), akin to the US withdrawing all currency except half its $1 bills. The goal was to combat black-market transactions that are a big part of India’s retail economy. Millions of people lined up at banks to deposit notes or exchange them for new denominations, though restrictions remain on how much cash they can withdraw, even at ATMs.
Rural residents were hurt the most because they use cash almost exclusively, from buying clothes or food to paying for weddings. As many as 600 million Indians probably do not have bank accounts, central bank data show, and a disproportionate number of them live in more than 600,000 small villages earning daily wages in cash. Those communities, dependent mostly on agriculture, account for about 60 per cent of India’s jewelry purchases.
Gold’s prospects in India may only get worse this year, said Shekhar Bhandari, head of global transaction services and precious metals at Kotak Mahindra Bank in Mumbai. While the reforms will aid the domestic banking system, investors probably will put money in other wealth-management products rather than bullion, he said.
Prolonged slump
The India Bullion and Jewellers Association Ltd. estimates it may take at least six months for the market to get back to normal, though demand usually slows in the monsoon months from June to August. That means purchases may not pick up until the end of the year, during the festival season.
“People have reduced their spending power, and they are more concerned with having enough money to buy essential items,” Ketan Shroff, joint secretary at the association, said by telephone from Mumbai’s Zaveri Bazaar.
Modi’s reforms may further erode demand by discouraging investors who used gold to keep their wealth off the government’s radar.
“One of gold’s qualities that attracted so many consumers in India is its lack of traceability,” Simona Gambarini, a commodities economist in London at Capital Economics Ltd., said by e-mail from London. “The government knows that, and in order to be successful in tackling illegal money, it will need to increase the transparency in the gold market.”
Tax issue
In the last few years, the government sought to rein in spending on gold from overseas. It raised the tax on imported bullion three times in 2013 and placed curbs on domestic sales after the current-account deficit widened to a record and the rupee fell to an all-time low. The deficit has since narrowed, prompting the government to lift most of the restrictions except for the import duty.
In 2015, Modi sought to reduce imports by tapping precious metal already in the country through some state-backed investment alternatives: sovereign gold bonds, a gold deposit programme and coin sales. Last year, the government imposed a 1 per cent excise tax on jewelry manufactured within the country. It is trying to implement a goods and services tax scheduled to start on April 1 and this may boost costs for customers, hurting demand further, said Bachhraj Bamalwa, a director at the All India Gems and Jewellery Trade Federation.
“In the last three to four years, the sector is struggling because of the government policies,” Bamalwa said by telephone from Kolkata. “As the government is concerned about the gold sector, they bring more and more policies centered around it. So we don’t know what is in the government’s mind and what it will do in 2017.”
Higher gold prices are not helping demand either. Gold for immediate delivery is up about 6 per cent this month to $1,213.22 an ounce after posting the first annual advance in four years. Prices have climbed this month on a reappraisal of political and economic risks as the UK gets to grips with the Brexit process and investors await Donald Trump’s inauguration.
Wedding season
Jewelers are banking on the wedding season to revive flagging sales. Wearing and gifting gold for newlyweds makes up around 65 per cent of India’s annual consumption of the metal. “Weddings can’t be postponed,” Bamalwa said. “That demand will be there.”
Ferreira, the bride-to-be without wedding rings, may have few options except to ditch the mom-and-pop jewelers and pay a higher price at a brand-name store that takes credit cards but charges extra for the service. “We are relying on the fact that after a quarter of dealing with the cash crunch, jewelers will be in a better position to take card payments,” she said. “If not, we will have to spend more on a card payment.”