A Brief Overview of How Gold Affects the GDP

The GDP or Gross Domestic Product of a country is the total production in the country. GDP is often considered one of the best parameters to understand and evaluate a country’s economy. A country’s GDP is influenced by various factors, from production to industries. Most of the transactions occurring in an economy are reflected in the GDP (Gross Domestic Product). Gold is a luxury commodity, and the price of gold has defining effects on a country’s economy. It influences the gross product and has a drastic impact on the national currency’s value.

What is GDP?

Before understanding the effects of the gold trade and the Gross Domestic Product, let us understand what exactly GDP is. In simple terms, GDP is defined as the total value of products produced in an economy in a financial year. GDP or Gross Domestic Product is the value of final goods and services produced within the nation’s boundary in one year. The GDP of a country is calculated by summing up the below-mentioned values:

• Net domestic private consumption.
• Total domestic investments.
• Total government spending.
• Gross trade balance.

Gold Market in India

Gold is a luxury commodity in India. Gold also has varied uses. It is primarily used to make ornaments. The cultural significance of gold makes India one of the biggest importers of gold in the world. In 2021, the Reserve Bank of India had a gold reserve worth 754 tonnes. India does not produce enough gold to sustain the ever-increasing demand, so it needs to buy it. The following are the major gold exporters to India:

• Switzerland (10.1 Billion Dollars)
• UAE (2.57 Billion Dollars)
• The Republic of South Africa (1.41 Billion Dollars)
• Peru (1.03 Billion Dollars)
• Ghana (853 Million Dollars)

Because India heavily relies on imports to meet its gold demand, the gold price dramatically influences its GDP. Let us understand how gold reserves and gold price affect India’s GDP.

How does gold affect India’s GDP?

As we already know, India has an overwhelming demand for gold. However, India does not have enough natural gold reserves, as gold mining is not a major economic activity. Hence, the country has to rely on importers for gold. In 2016, India imported 6.1 billion worth of gold from various countries. This indicates India’s demand for gold.   

However, such a high number of purchases of a luxury commodity is not a good sign for the gross product of the economy. The following points can explain how the gold trade affects the GDP:

• Because most gold reserves are imported into the country from the major gold mining countries, the money a consumer spends on purchasing gold effectively goes to the exporter country at the cost of the Indian rupee.
• These transactions disrupt the balance between money flow by directly sending it to a foreign currency. This accounts for the depreciation of the Indian rupee globally.
• Heavy imports of gold increase the country’s trade deficit, effectively hurting numbers in GDP evaluation.
• Attempts have been made to discourage the public from buying gold by increasing import duties on the gold trade.
• In the past couple of years, gold imports have significantly reduced. However, demand for gold remains high.

Government Intervention

The Government of India does realise the adverse effects of gold trade on the gross domestic product and the currency of the country. To address this, the government has taken some measures:

• Calling it a luxury item, the import duties on gold are increased from time to time.
• The import duty on imported gold remains more than 10%.
• The government has actively urged people not to buy gold and look for alternatives.

The government’s attempts have made some difference, as the gold trade has significantly reduced in value in the last couple of years. However, the gold price and imports still put tremendous pressure on the Indian economy. There is a long way to go to sustain a reasonable gold trade.

Conclusion

India is not a traditional gold mining country. Therefore, most gold is brought to India from foreign exporter countries. Switzerland is India’s biggest exporter of gold.

Gold is a luxury item, and it has cultural significance in India. Therefore, there is an overwhelming demand for gold products. Because gold is imported, it causes a large trade deficit in the Indian economy. It also burdens the GDP. The government has imposed heavy import duties on the purchase of gold to discourage people from buying gold. These attempts have been somewhat successful.