Falling demand for gold is good for the economy

The fall in demand, however, is not as dramatic as the fall in imports, even though consumer sentiment was muted by slowing economy and elevated prices. Consumer demand fell 32 per cent in the July-September 2019 quarter, from a year ago, compared to the 66 per cent fall in imports. While some proportion of the demand must have been met by consumers trading in old jewellery, coins and bars, it is likely that the fall in imports is an overestimation. This is because it is an accepted fact that the inflow of gold through unofficial channels surges whenever import tariffs are increased, and inflows through official channels drop. The government had increased import tariffs on gold from 10 per cent to 12.5 per cent in July 2019, at a time when gold prices were rising globally. Therefore, that increase in duties may have hurt the government’s revenue rather than help. The government would do well to keep tariff moderate and stable for items such as bullion where small change translates to a significant change in prices.

A small portion of the fall in demand for physical gold is also the result of investors turning to various gold-backed saving instruments such as gold bonds as against buying coins and bars to diversify their investment into different classes of assets. This is a good development and the government would do well to encourage investors to actively consider such instruments.

Courtesy: Hindu Business Line