Gold in India

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explores gold’s multifaceted significance in India, examining its historical roots, economic impact, cultural value, and future potential.

Introduction

India’s association with gold is ancient, with the metal symbolizing prosperity, purity, and wealth. For centuries, gold has been valued as an adornment and a symbol of security and status, affecting both urban and rural economies across the country. With India and China together accounting for over 50 percent of the world’s gold demand, World Gold Council dated October 2024, understanding its importance goes beyond investment; it’s a story of tradition, economic significance, and national pride. As one of the world’s top gold importers, India’s reliance on imported gold introduces opportunities and challenges for its economy.

Historical Significance of Gold in India

This refers to the ancient history, religious and cultural ties, historical trade, and treasure of gold.

Ancient History

India’s relationship with gold dates back to the Indus Valley Civilization (circa 3300–1300 BC), where archeological finds have unearthed gold jewelry, indicating the metal’s early status as a precious material. India was a central hub in ancient trade, exchanging spices, textiles, and precious metals. Gold was both imported and exported, flowing from regions like Persia and Egypt, as traders recognized India as a rich market. This trade bolstered India’s gold reserves and established the metal as a key part of economic and social transactions.

Below figure shows a photograph of a group of goldsmiths (Sonars) seated around a low work table in Bombay, taken by Shivashanker Narayen in c. 1873, from the Archaeological Survey of India Collections.

Photograph of a group of goldsmiths in 1873

Source: shoplune

Religious and Cultural Ties

Gold holds divine significance in Hindu mythology. According to legend, the Hindu goddess Lakshmi, the deity of wealth and prosperity, is adorned in gold, symbolizing abundance. This association with divinity makes gold not only valuable but auspicious, embodying good fortune and blessings. Gold has sacred connotations, used extensively in temples, idols, and as offerings to deities. Temples like Tirupati and Padmanabhaswamy house enormous gold reserves, signifying the metal’s spiritual importance.

Below figure shows a picture of the Hindu god Sri Padmanabhaswamy reclining on the serpent Anantha which is one of the golden treasures of India

Sri Padmanabhaswamy reclining on the serpent Anantha

Source: Forbes

Cultural and Social Importance of Gold

In many regions, particularly in rural India, gold represents financial stability. It is often considered a “safe asset” that can be sold or pledged in times of need. It is a staple in Indian weddings and festivals like Diwali and Akshaya Tritiya, where it symbolizes luck and prosperity. Families across income levels save and invest in gold, especially for daughters’ weddings.

According to the World Gold Council (WGC), Indian households hold approximately 25,000 metric tons of gold, accounting for nearly 40% of global private gold holdings in the world. Gifting gold remains a widespread tradition in India, passed down through generations as family heirlooms and regarded as wealth that grows with time. WGC expects the average demand to reach around 850 to 950 tonnes per annum by 2020 at an annual growth rate of 35 percent with two-thirds of its market coming from rural markets, that is households.

Because of the emotional value associated with household jewelry, people rarely sell their gold to meet their immediate financial needs, as an alternative people pledge their gold ornaments as short-term loans, such loans are called organized gold loan markets.

Below figure shows, an organized gold loan market projection(as mentioned above), INR 3101 billion by 2020 at a three-year CAGR of 13.17 percent

Gold loan market projection

Source: KPMG

Economic Impact of Gold in India

India’s gold consumption significantly affects its economy, with implications for trade, financial stability, and national savings.

Gold as a Financial Asset, Trade Balance and Foreign Exchange

Inflation Hedge: Gold is traditionally seen as a hedge against inflation, protecting wealth during economic downturns. Its ability to retain value attracts investors during periods of high inflation or currency devaluation. For a rigorous analysis of this question, you can read the academic articles by Erb and Harvey (2013 and 2024) that challenge the traditional view that gold is a hedge against inflation.

Risk Diversification: Investors across India use gold to diversify their portfolios, as gold prices often perform inversely to equity markets. This reduces risk, providing a balance during times of market volatility.

High Import Dependency: India imports over 80% of its gold, making gold purchases a significant contributor to the trade deficit. In 2021, gold imports cost the Indian economy around $55 billion, placing substantial pressure on the country’s current account.

Import Duty Adjustments: To counter rising imports, the government levies an import duty on gold (currently, in 2024, around 6%), aiming to curb demand and balance the trade deficit. However, this often leads to price-sensitive demand fluctuations.

During the July 2024 Union Budget, Finance Minister Nirmala Sitharaman announced a drop in customs duties on the import of gold, silver and platinum. Due to this, the current duties drop from 15% to 6%, a significant cut of 9% in import duty on gold.

Below figure shows, import customs duty on gold, from 15 percent in July 2022, to 6 percent in July 2024.

Gold customs import duty

Source: World Gold Council (WGC)

Contribution to the Indian Economy Through Employment and Taxes

Employment in Jewelry and Trade: India’s gold industry employs millions, from miners and artisans to retail jewelers. Major gold hubs like Mumbai and Jaipur have vibrant trade networks, supporting local economies and artisan crafts. The Federation of Indian Chambers of Commerce & Industry (FICCI) and the World Gold Council (WGC) (September 2022), report that the gold industry contributes over $30 billion to India’s GDP annually, with the jewelry sector alone employing around 4.6 million people, spanning from goldsmiths to retail traders and related support sectors.

Tax Revenue: The gold industry is a source of government revenue through import duties, GST on gold purchases, and income tax from jewelers and traders.

Shift Toward Formal Investments: Younger and urban investors are increasingly investing in structured products like Sovereign Gold Bonds and Gold ETFs, signaling a gradual shift from physical gold to formal investment avenues.

Gold’s Impact on Financial Policies and Regulations

Policy on Import and Consumption: India’s government frequently adjusts gold import policies to control demand and influence economic stability. High demand often prompts higher import duties or restrictions to limit the impact on foreign exchange.

Regulation of Financial Gold Products: To support formal financial growth, the government offers options like Sovereign Gold Bonds, which promote investment without affecting the trade balance. These bonds allow investors to gain from gold’s price appreciation without physical ownership.

Anti-Smuggling Efforts: Due to high import duties, gold smuggling has become an issue. Regulatory efforts focus on reducing smuggling to ensure that the government earns tax revenue from gold imports.

Gold’s Role in Modern India

Gold in Indian Independence

During India’s independence movement, 1857-1947, leaders urged citizens to donate gold for the national cause. This movement emphasized gold’s role as a unifying asset for Indians across social classes.

Continuing Cultural Significance in Post-Independence India

The importance of gold has persisted in modern India, with a large part of household wealth still held in physical gold. Even as digital and financial assets grow, gold remains a stable and respected form of wealth storage.

Evolution with Government Policies

Post-independence, gold import policies, and the introduction of schemes like the Gold Monetization Scheme and Sovereign Gold Bonds have attempted to modernize India’s relationship with gold, encouraging citizens to treat it as an investment rather than simply a family heirloom.

Gold Markets and Demand in India

Based on the data given by Statista, the demand for gold across India was about 747.5 metric tons in 2023. This represented a decrease of three percent in comparison to the previous year, when the gold demand was 774 metric tons.

Below figure shows fluctuations in the annual demand volume of gold across India from 2010 to 2023.

Annual gold demand volume from 2010 to 2013

Source: Statista

Regional Gold Hubs: Cities like Mumbai, Kolkata, and Chennai have bustling gold markets, with jewelry demand highest in Tamil Nadu, Kerala, and Maharashtra.
Jewelry vs. Investment Demand: While traditional gold jewelry demand remains high, investment in gold bars, coins, and newer avenues like digital gold is rising.
Gold Price Sensitivity: Indian consumers are sensitive to gold price fluctuations, with demand typically increasing during periods of price stability or decline.

Conclusion

Gold remains the top choice for many investors for portfolio diversification or protection against economic instability. This precious metal has held its value over centuries. While market prices fluctuate, many still choose to buy gold to secure their financial future.

Why should I be interested in this post?

Gold has been a key financial asset for centuries, acting as a store of value, a hedge against inflation, and a safe-haven asset during economic crises. Understanding its investment options helps students grasp fundamental market dynamics and investor behavior, especially during periods of economic uncertainty.

Useful resources

Academic research

Erb, C.B., and C.R. Harvey (2013) The Golden Dilemma. Financial Analysts Journal 69 (4): 10–42.

Erb, C.B., and C.R. Harvey (2024) Is there still a Golden Dilemma. Working paper.

Bogle, John C. (2007). The Little Book of Common Sense Investing. John Wiley & Sons.

Business

World Gold Council (WGC) India’s gold jewellery market structure

World Gold Council (WGC) Indian gold import duties reduced to the lowest level in over a decade

KPMG (2017) India’s gold loan market: Is it glitter fading?

Shoplune The Story Of India And Gold Through The Ages

Statista Annual demand volume of gold across India from 2010 to 2023

Other

Wikipedia Gold

About the author

The article was written in October 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).