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Indians love gold, and that love reveals itself in umpteen ways. The World Gold Council report in 2017 states that Indian households own a gold stock of about 23000 to 24000 metric tons. According to another report, India’s Gems and Jewellery industry contributes to around 7% of its GDP and constitutes 13.30% of total merchandising exports. Indian consumption and fabrication of gold is the primary factor that drives countries’ gold market. Both factors impact the Indian economy by adding economic value, increasing employment, growing foreign exchange earnings and trade balance.
Gross Domestic Product or GDP
GDP is commonly used to measure the actual output or economic growth. During a certain period, the cash worth of total finished products and services manufactured in a nation is its Gross Domestic Product or GDP.
GDP and Gold
The GDP is the count of total output produced within the nation’s boundaries. That’s why the GDP continues to be thoroughly monitored. The gold market is no exception. The National Statistical Office releases the GDP of India. According to their report, the upcoming release of quarterly GDP for the quarter of January- MarchMarch, 2022 and the Provisional Annual Estimates for the year 2021-22 will be released on 31.05.2022.
According to the literature, two channels of GDP influence the price of gold faster.
Income Consumption Channel
Peoples’ income and purchasing power increase with a faster-growing economy. It also increases the demand for gold; forever, gold’s value depends not on users’ demand but on investment demand.
Safe Haven Channel
According to the haven theory, when GDP grows, the investment demand falls. A negative mutual relationship exists between the gold value and GDP growth.
Gold plays the most outstanding contribution to Indian economic health. Let’s glance at how gold affects financial health in different ways.
Gold Mining
At the lowest level, gold mining has been happening in India since time immemorial. Gold mining can contribute significantly to India’s long-term socio-economic growth. Furthermore, mining contributes to infrastructure funding in a region and the establishment and support of adjacent service sectors. In 2015, around 45,000 ounces of gold were mined.
Gold Refining
In recent years, India’s long-established refining business has experienced a dramatic increase in new capacity. The organised refining environment has risen dramatically from three to four refineries in 2013 to 30 refineries in 2015. India’s total refining capacity is currently more than 1,450 tonnes, much higher than the average annual gold imports over the last five years.
Gold Manufacturing
For ten years, there was no large-scale gold manufacturing facility. But now, approx 10% of India’s gold production is a well established and organised industry. Many large-scale gold manufacturing facilities add value to the gold economy in India. Nearly 65 per cent of the jewellery produced in India is handcrafted, and the great bulk of the industry is characterised by tiny workshops employing two to four goldsmiths.
Gold Loan Industry
The use of gold as security has long been a hallmark of the Indian gold market. There are many official and informal gold loan providers such as banks, money lenders, non-banking financing businesses, and pawnbrokers. According to recent research, the demand for gold loans from micro-enterprises and individuals to fund working capital and personal requirements has increased. According to Reserve Bank of India’s statistics, loans against gold jewellery portfolios of scheduled commercial banks increased by 59% to 63,770 crores on September 24, 2021, from 40,086 crores in September 2020.
Impact of Gold on the Current Account Deficit
As a general rule, the higher the CAD concerning GDP, the riskier it is for the entire economy. Gold is the second most commonly acquired foreign commodity after oil. Imports reached such high levels under the UPA government, and P. Chidambaram, who was the Finance minister during UPA rule, urged the Indian people to avoid the temptation to buy gold since it would have a beneficial influence on multiple aspects of the nation’s economy. While the present NDA administration has reduced the current account deficit in India, the essential worry in the minds of financial and economic experts is whether or not sufficient money is coming into the Gold economy in India to compensate for the gap.
Impact of Gold on Exports
Over the last decade, Indian jewellery exports have expanded to 160 nations. From April to December 2017, India’s gems and jewellery exports totalled $24.89 billion. During the same period, cut and polished diamond exports totalled $17.2 billion, accounting for about 69 per cent of all gems and jewellery exports in value terms. From April-December 2017, gold coin and medallion exports totalled $1,736.02 million, while silver jewellery exports were at $3,114.85 million.
Conclusion
Gold is a reliable predictor, swiftly incorporating investors’ assumptions about the long term prospects; as a result, gold performs a better job of recession forecasting. GDP growth may have a host of positive effects on the gold market. Many of them realise the trend, the source of development, and how the growth affects the Fed’s activities. Though the demand for gold to GDP ratio by country has always been high, the past four years have seen the market turn into an investment. Everyone who has the money goes in for gold, adversely affecting India’s Gold economy.
