1: The drivers of Indian gold demand

Two significant factors influence Indian gold demand over

the long-run: rising incomes have a positive effect and higher
gold prices have a negative effect. Income is the most powerful
factor, and income levels are expected to rise. The IMF has
forecast per capita GDP to grow by 35% for 2015–2020,2 and
the National Council of Applied Economic Research expects
India’s middle class to double, exceeding 500mn by 2025.
There are some interesting short-run dynamics too: gold
demand is spurred on by inflation, rises with a good monsoon,
and is dampened by higher import taxes and other restrictive
measures. By 2020 we expect Indian gold demand to average
850t to 950t per annum.

Understanding what drives Indian Long-run drivers of gold demand

gold demand
Gold demand is driven by a combination of factors
that interact with each other. These factors are often
described qualitatively, but taking a quantitative approach
can complement common wisdom and deliver additional
insights. As such, we undertook an econometric analysis
to understand gold’s demand behaviour.
Of course, an econometric analysis helps identify some
of the most salient drivers of demand, but not all. In a
country as diverse as India, other factors not captured
by simple econometric analysis play an important role in
shaping gold demand.
In this chapter we discuss the findings of our econometric
analysis of the long- and short-run determinants of
gold demand.3 We also delve into aspects of Indian
demographics and economic development that may
help us understand not only gold demand today, but
also its prospects for the future.
Our analysis, using annual data from 1990 to 2015,4
reveals two significant factors affecting gold consumer
demand – jewellery, and bar and coin combined – over the
long-term. All else being equal, gold demand is driven by:
• Income: gold demand rises with income levels.
For a 1% increase in income per capita gold demand
rises by 1%
• Gold price level: 5 higher prices deter gold purchases.
For a 1% increase in prices, gold demand falls by 0.5%.
This is intuitive. One would expect gold demand to rise
with income and fall with price. But it also highlights
the respective strength of these two forces. Demand
responds more to income than it does to price. This helps
explain why gold demand increased from around 700t in
2000 to around 1,000t in 2010, despite a dramatic increase
in the gold price over the period. The impact of the 137%
increase in the rupee gold price was outweighed by the
78% increase in per capita income.6

2 IMF World Economic Outlook. April 2016. Forecast in constant prices.

3 For more detail, please see Appendix.
4 Prior to the 1990s, government regulation made gold imports illegal. This changed in 1992, resulting in a structural change in the gold market dynamics.
We concentrate on the period starting in the 1990s for three reasons: 1) to have consistent models across the various demand categories; 2) to avoid
difficulties modelling the structural shift; and 3) because econometric models using series for which the pre-1990s data is available and seemingly reliable
(e.g jewellery) delivered results consistent with those using only post-1990 data.
5 Gold price level refers to the absolute gold price, rather than changes in that price.
6 IMF WEO.

India’s gold market: evolution and innovation 08

Factors affecting Indian gold demand

Long-term factors

1.5
Rising incomes have a positive effect on Indian gold demand and
higher gold prices have a negative effect
Gold demand and household income Gold demand and gold price
billion
Forecast for Indian population
by 2030 +1 %

-0.5%

The Indian middle class

is expected to rise to
For a 1% increase in income, 1% increase in prices,
For a
gold demand rises by 1% gold demand falls by 0.5%
547 million by 2025

The rise of the young, Indian, middle-class worker

is expected to lead to increased gold demand

Indian culture supports gold As the population becomes more Higher household incomes
demand across religions urbanised, earning power increases boost gold demand

Short-term factors

Inflation Gold price Excess

changes rainfall
For a 1% increase in inflation, demand For a 1% increase in the gold price, A 1% increase in monsoon rainfall
increases by 2.6% demand will decrease by 0.9% above the long-run average, boosts

2
gold demand by 0.5%
1

GOLD DEMAND CHANGE (%)

-1

Investors around the world turn to In the first half of 2013 Rupee gold A good monsoon can increase crop
gold to protect against inflation. ‘13 price fell 20%, while consumer yields, sweep money into the rural
India is no different. demand leapt 37% year-on-year. economy and boost gold demand.

India’s gold market: evolution and innovation 09

Short-run drivers of gold demand
There are some very interesting factors that affect
gold demand in the short term, too. Holding everything
else constant these are:
• Inflation: For a 1% increase in inflation, gold demand
increases by 2.6%. Investors around the world turn to
gold to protect against inflation. India is no different
• Gold price changes: For a 1% fall in the gold price,
demand will increase by 0.9%. As well as having an
effect over the long run, the gold price also affects
short term dynamics. When the gold price falls sharply,
consumers respond quickly. This is best illustrated by
the events of 2013. Between 31 December 2012 and
28 June 2013 the rupee gold price fell 20%. Over the
same period consumer demand leapt 37% year-on-year.
Two other factors affect gold demand, although
statistically they are not as significant as the factors
described so far:
• Excess rainfall: A 1% increase in excess rainfall, as
measured by the amount of rainfall compared to the
long-run average rainfall, boosts gold demand by 0.5%.
The monsoon is important for India’s agricultural sector.
A good monsoon can increase crop yields, sweep
money into the rural economy and boost gold demand
• Tax regime: Holding everything else constant, the
higher rate of import duties since 2012 have depressed
demand by 1.9%.
This analysis is heavily skewed by the factors affecting
jewellery demand; it accounted for around 80% of Indian
gold demand between 1995 and 2014, after all. The factors
affecting bars and coins are similar, but subtly different.
We touch upon them in more detail in Chapter 5.
7 Hindustan Times, July 2013.
8 Census 2011.
India’s gold market: evolution and innovation
This econometric analysis uncovers just some of the
fundamental factors that drive Indian gold demand over
the long- and short-term. But these should not be viewed
as prescriptive; the relationships should be used as a
framework for people to understand the broad trends.
Greater insight is required to form a more rounded picture.
For example, too much rain during a monsoon can be bad
for crops; heavy rains in 2013 damaged crops and reduced
yields, rather than boosting incomes.
The rest of this chapter provides more detail on the
drivers of gold demand uncovered by the econometric
analysis, as well as some of the other macroeconomic
and demographic factors which may affect India’s gold
demand in the coming years.
India’s population
is expected
to reach
1.5bn by 2030.
India’s demographics
India is a diverse country, home to more than 700 7
languages and dialects, and a plethora of faiths and beliefs.
While 80%8 of the population follow Hinduism, India is
the birth place of Buddhism, Jainism and Sikhism too.
This diversity is not captured in the econometric analysis,
although market research indicates that levels of gold
ownership and consumption patterns do not tend to differ
by religion. This suggests that the cultural aspect of gold,
which underpins Indian demand, cuts across religious
differences. For large swathes of India’s population, gold is
intertwined with their way of life.
10
 It has a large population which continues to grow
India’s population has grown rapidly. In 1900, its
population was 238mn. By 2011 this had increased
more than four-fold to over 1.2bn.9 It is the second most
populous country in the world and the largest democracy.
To illustrate its size, Uttar Pradesh is the most populous
state with more than 199mn residents (Chart 5); this is
more than Russia. If we add Uttar Pradesh to the second
most populous state, Maharashtra, it totals 312mn, similar
in size to the US.
India’s economy is expected to benefit from a
demographic dividend
India’s population is relatively young. More than 45% are
below the age of 25 (Chart 6). In China and the United
States the figure is closer to one third.10 According to the
United Nations, the number of people within the working
age population (15–64) will increase as the people within
the 0 –14 age range transition to the working population.
The UN estimates that by 2050 India’s working population
will total 1.1bn.

The rate of population growth, however, is slowing.

Between 1991 and 2001 the population grew by 21.5%;
this dropped to 17.6% between 2001 and 2011. But it is
growing nonetheless and the United Nations Population
Fund expects India’s population to reach 1.5bn by 2030.

Chart 5: Top ten states by population Chart 6: India's population distribution reveals an
abundance of youth
Millions Millions
250 300
These two states
are equal to the US More than 45%
250 of people are under
200
the age of 25; this
demographic dividend
200 will boost India's
150 economy

150

100
100

50
50

0 0
0-14 15-24 25-54 55-64 65+
h

ra

at
ga
ha

ak
es

es

es

ad

ha
ht

ar

Age group
en
Bi

at
d

ad

ad

st

uj
as
ra

rn
tB

ja

G
il
Pr

Pr
ar
rP

Ra

Ka
ah

es

ra

Ta

Male Female
tta

hy
M

dh
U

ad
An

Source: Ministry of Home Affairs Census 2011; World Gold Council Source: CIA World Factbook 2015; World Gold Council

9 Census 2011.
10 CIA World Factbook, 2015.

India’s gold market: evolution and innovation 11

It is likely that India’s youthful population will spur on its
economy. There is a wealth of research suggesting that
economic growth increases as the number of productive
people in the workforce increases – economists refer
to this as the demographic dividend.11 This is not just an
academic theory. Many economists put the East Asian
growth miracle down to the large swell in working-age
population between the 1970s and the 1990s.12
India is becoming increasingly urban
India’s population is skewed towards rural areas, with
67%13 of Indians residing there. The Central Statistics
Office agricultural census estimates that the number of
people employed directly in farming totals 263mn.
The World Bank, however, estimates that some
600mn people rely on farming crops or rearing livestock
for their income.14
But this is changing. Although the majority of Indians still
live in rural areas, an increasing number choose to live in
cities (Chart 7). With economic growth centred in larger
conurbations, many people – mostly young – have migrated
to cities in order to earn better incomes. Urbanisation has
also led to an increase in the number of large cities. Cities
with a population greater than one million people increased
from 35 to 53 between 2001 and 2011.

Chart 7: Urbanisation has accelerated over the last few decades

Millions
1,400

1,200

Cities with a population greater than 1 million

1,000
increased from 35 to 53 between 2001 and 2011

800

600

400

200

0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Rural population Urban population
Source: World Bank; World Gold Council

11 The Handbook for the Indian Economy, Chetan Ghate, Oxford University, 2012.
12 East Asia was one of the world’s fast growing regions during the 1980s and 1990s, in terms of GDP and GDP per capita.
This is often referred to as the East Asian miracle.
13 World Bank.
14 www.worldbank.org

India’s gold market: evolution and innovation 12

This matters because cities generate wealth. No country
in the industrial age achieved significant growth without
urbanisation. Workers in urban areas are more productive
and earn more than rural workers. Cities offer large,
diversified labour pools and, by having a concentration
of educated workers, are more likely to generate new
ideas and technologies.15 Urbanisation in India is likely to
continue to support economic growth.
Against this backdrop, in 1991 the government started
to introduce policy measures that led to the liberalisation
of the Indian economy. Red tape was cut away, import
tariffs reduced and markets deregulated. This laid the
foundations for future economic growth, with GDP growth
averaging 7.3% from 2001 to 2010, up from an average of
5.6% in the 1990s.

Yet there is a subtle nuance to India’s urbanisation. It is

not just a migration from the countryside to the cities.
India’s middle class
Rural India has changed too. There has been a growth in
semi-urban towns, as well as a rapid development in rural

15–20%
India itself. Population growth in smaller towns and
semi-urban centres has outstripped that in metros,
supported by better infrastructure, stronger road and rail of population
connectivity, and improved communications.

Income levels and savings

individuals earning
In 2015 India was the fastest growing country in the
world; at 7.3% its GDP growth was ever-so-slightly ahead
of China’s and comfortably ahead of Western markets.
Rs240k–720k pa
The IMF described it as “the bright spot in the global
landscape.” 16 As the econometric analysis identifies, this total middle class
economic growth underpins India’s gold demand.

Liberalisation in the 1990s laid the foundation for

economic growth
India’s economic history can be divided into two distinct
phases: pre- and post-liberalisation. The former covers
1947–1991 when the government followed policies which
were bureaucratic, laden with red tape and inward looking.
Corruption was rife. India’s annual GDP growth averaged
3%–3.5%.17
Poor economic policies were compounded by droughts
and famines. The government had to borrow to finance
its deficit to the extent that its debt to GDP ratio hit 75%18
in 1990. The following year India suffered a balance of
payment crisis.
200–250mn
Household incomes have increased
The reforms of the 1990s led to better job prospects and
higher incomes for millions of Indian households. GDP
per capita rose and millions of people were lifted out of
poverty. According to the World Bank, the percentage of
the population living on less than US$2 per day fell from
around 46% in the early 1990s to around 21% in 2011.19
The combination of a large population and rising incomes
means India has one of the world’s largest middle
classes. Up to date information on the size of India’s
middle class is hard to find. In 2010, the National Council
of Applied Economic Research (NCAER) estimated that
India’s middle class would reach 267mn by 2015–16. The
market research group TNS defines India’s middle class
as individuals earning Rs240,000–Rs720,000 a year. It
estimates that this captures 15%–20% of the population,
putting India’s middle class between 188mn and 250mn in
2015. Based on these estimates, it is probably safe to say
India’s middle class is between 200mn and 250mn.

15 David Bloom et al, Urbanisation and the wealth of nations, 2008.

16 http://www.imf.org/external/pubs/ft/survey/so/2015/car031115a.htm
17 Ministry of Finance.
18 IMF World Economic Outlook.
19 World Bank.

India’s gold market: evolution and innovation 13

Given India’s demographics and economic trajectory, this
large middle class is set to grow. NCAER forecasts that
it could reach 547mn by 2025. The Brookings Institution
thinks that by 2030, India’s middle class could be the
world’s largest, ahead of both the US and China.20
Savings rates are high
As income levels have increased, so too has the amount
saved. From 1980 through to 2014 the savings rate
increased from 18% to 32%, peaking at 37% in 2007.
The IMF expects it to stay around 30% up until 2020.21
Thereafter it will likely be bolstered by the swelling ranks
of the working-age population.
Import restrictions and taxes
In 2013 the Congress government began to ratchet up
gold import restrictions, starting with import duties before
moving on to a complex set of rules governing gold
imports and exports. (For more information on India’s
gold related policies, please see Chapter 10.) Why did
these restrictions come about? To understand we need to
consider India’s trade balance and current account deficit.
India’s current account deficit increased from the
1990s onwards
Prior to economic liberalisation in 1991, the country
suffered from inward-looking policies. India had very
little trade with the world during the early 1990s, instead
focusing on protecting its domestic industry. In sharp
contrast, post-liberalisation has seen the share of exports
double in overall GDP terms, whilst imports increased
even further. The trade balance in the early 1990s
was less than Rs100bn, but it has since increased to
Rs8,423bn in 2014–15, peaking at over Rs10,000bn in
2012–13 (Chart 8).

Chart 8: India’s trade deficit increased following trade liberalistion in the 1990s
Rupees bn
2,000

-2,000

-4,000 Economic liberalisation in

the early 1990s boosted
-6,000 economic growth and trade

-8,000

-10,000

-12,000
1988-89 1994-95 2000-01 2006-07 2012-13
Total trade balance Oil Non-oil
Source: Director General of Commercial Insights and Statistics; World Gold Council

20 Bookings Institution,The Emerging Middle Class in Developing Countries, 2011.

21 IMF World Economic Outlook, April 2016.

India’s gold market: evolution and innovation 14

One of the biggest components of India’s imports is crude
oil. Given the need to import more than 90%22 of its crude
oil consumption, oil contributes nearly one third of
India’s import bill. The second largest part of the import bill
is gold. Imports of gold increased to Rs2,107bn in 2014–15
from a low of Rs24bn in 1996–97.23 Between these two
dates gold accounted for, on average, 8% of total
imports (Chart 9).
Despite the high dependence on imports the current
account deficit (CAD) was typically under control. This
changed during the late 2000s: the economic slowdown in
Europe, spiralling oil prices and rising gold imports caused
the CAD to balloon. It increased to Rs4,796bn in 2012–13
from less than Rs116bn in 2000–01.24 The current account
deficit rose to 4.7%25 of GDP in 2012–13 (Chart 10).
Misplaced government policies tried to reduce the
CAD by restricting gold imports
The government was forced to take action. A raft of import
restrictions were imposed, including on gold. Duties on
gold imports were steadily increased, rising from
2% to 10% between January 2012 and August 2013.
Soon after, the government implemented the unwieldy
and market-distorting 80:20 rule, whereby those importing
gold were required to export 20% as jewellery.26
These gold-specific import restrictions had a few effects.
First, as highlighted in the econometric analysis, gold
demand eased a little. This was largely because the import
duties and 80:20 rule pushed up the premia in the local
market, created uncertainty and, at the margin, deterred
some potential gold buyers.

Chart 9: Gold imports in India Chart 10: India's current account deficit
Rupees bn % Rupees bn % of GDP
3,000 20 1,000 2

Gold imports have accounted for

2,500 0 0
an average 8% of total imports
15

2,000 -1,000 -2

1,500 10 -2,000 -4

The current account deficit peaked at

1,000 -3,000 4.7% of GDP in 2012 –13 -6

500 -4,000 -8

0 0 -5,000 -10
1996-97 2002-03 2008-09 2014-15
5

3
1

5
-0

-1
-0

-0

-0

-0

-1

-1
04

12
00

02

06

08

10

14

Gold imports % of total imports (rhs)

20

20
20

20

20

20

20

20

Source: Department of Commerce; World Gold Council Current account deficit, Rupees bn
Current account deficit as % of GDP (rhs)
Source: RBI; Economic Survey 2015-16; World Gold Council

22 Ministry of Commerce, Ministry of Finance, 2015.

23 Department of Commerce, Ministry of Commerce and Industry.
24 Reserve Bank of India.
25 Ibid.
26 The 80:20 rule came into effect on 22 July 2013 and was in force until 28 November 2014.

India’s gold market: evolution and innovation 15

More importantly, the restrictions drove parts of the gold
supply-chain underground. Smuggling increased sharply.
Between Q3 2013 and Q4 2014 around 335t of gold was
smuggled into the country. So while official imports into
the country fell, unofficial imports increased. It is true that
the current account deficit narrowed (Chart 10) during this
time, but with huge inflows of gold being smuggled into
the country, the efficacy of the import restrictions must be
called into question. (Please see Chapter 7 for more detail
on gold smuggling.)
Agricultural production and monsoons
Agriculture is a key component of the national economy,
especially the rural economy. As mentioned previously,
the World Bank estimates some 600mn people rely on
farming crops or rearing livestock for their income. The
econometric insight that the monsoon has an impact
on gold demand in the short-run comes as no surprise.
But these factors are probably not as significant to gold
demand as they once were.

The importance of agriculture has waned a little

As India has urbanised, agriculture’s share of GDP has
Between Q3 2013 and Q4 2014 steadily declined from 45% in the 1970s to 17% in 2015.

c335t In recent years, services, especially IT, have come to the

fore (Chart 12).
of gold was smuggled
into India. 600mn people rely
on farming for
Inflation their income and
Inflation has been a problem for India, regularly spiking there is a deep
to 10% and above since 1980 (Chart 11). Industrial
expansion and high food prices have led to inflationary
rooted tradition of
pressures, which have caused economic uncertainty. investing in gold
Given its attributes as an inflation hedge, Indians have
turned to gold in order to protect their wealth, and that
for this sector.
of future generations.

Chart 11: Indian CPI% change per annum Chart 12: Agricultural sector declining contribution
to GDP (value added, % of GDP)
YoY% change % of GDP
16 50

Industrial expansion and volatile 45

14
food price underpin high inflation
40
12
35
10
30

8 25

20
6
15 In 2015 agriculture accounted for
4 just 17% of GDP, but supports some
10 600mn livelihoods
2
5

0 0
1980 1985 1990 1995 2000 2005 2010 2015 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Source: IMF; World Gold Council Source: World Bank; World Gold Council

India’s gold market: evolution and innovation 16

Nor is rural India completely reliant on agriculture. In recent
years, rural areas have developed better infrastructure
and transport links, which have allowed manufacturing
to become a more important part of the rural economy.27
According to a 2012 Credit Suisse report, between 1999
and 2009, 70% of all new manufacturing jobs and 55% of
India’s manufacturing GDP came from rural India.28
There are support mechanisms in place to protect
farmers from weak monsoons
But agriculture is still important and the monsoon plays a
key role in the economy. Even though India is no longer
an agrarian economy, the lack of proper irrigation in many
areas means large parts of agriculture are still dependent
on monsoon rains. In the absence of modern farming
techniques a deficient monsoon can have adverse
effects on the Indian rural economy and, consequently,
its gold demand.
Politicians are aware of the impact a deficient monsoon
can have on large numbers of farmers and there are
mechanisms in place to protect rural incomes in such an
event. The government-owned Food Corporation of India
aims to protect farmers from sharp drops in food prices,
via the Minimum Support Price (MSP). This long-standing
scheme provides a price-floor for a number of key crops.
In early 2016, Narendra Modi’s government introduced a
re-vamped crop insurance scheme, which aims to reduce
premium charges and increase payouts to farmers in the
event of natural disasters such as drought.
27 Indian Council for Research on International Economic relations, Is manufacturing moving away from India’s cities, 2012.
28 Credit Suisse, India Market Strategy, The great Indian equalisation, 19 April 2012.
India’s gold market: evolution and innovation
Outlook
The outlook for gold demand is good. Our analysis
indicates that per capita income is one of the most
significant factors underpinning gold demand and will
increase over the coming years: the IMF expects growth
of 35% from 2015 to 2020. More generally, India’s
middle class will grow. The NCAER expects it to reach
547mn by 2025.
India’s economic growth will be supported by strong,
structural factors. The first is demographic. India’s
economy will receive a boost as its youthful population
enters the work force. The slow, but steady trend of
urbanisation will continue to support economic growth by
offering higher incomes than rural areas and fostering
an environment in which workers can create new ideas
and technologies.
There will inevitably be short-term fluctuations.
Consumers will respond quickly to changes in the gold
price and the vagaries of the monsoon will continue to
play a role: a good drenching will boost demand, while a
disappointing drizzle might cause the rural economy
to sputter.
And of course there are risks. Any tightening in
gold-related policies, such as the measures that have
recently been implemented to regulate and formalise
the gold industry, are disruptive and will stifle demand
in the short to medium term (please see Chapter 10 for
a discussion of gold policy).
But given that income is the most significant factor
affecting Indian gold demand, and the outlook for income
growth is good, we expect India’s gold demand to remain
robust at between 850–950t by 2020.
17