Note4Students
From UPSC perspective, the following things are important :
Mains level: Market Economy; Demand and Supply; Gold Market;
Why in the News?
According to the World Gold Council, Gold investments in India increased by 60% in 2024, reaching $18 billion (around Rs 1.5 lakh crore), compared to the previous year.
What are the Key highlights of the Report?
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What are the reasons for the Increase in Gold Demand in India?
- Cultural Significance: Gold is deeply ingrained in Indian culture, and its purchase is considered auspicious during festivals and weddings. For example, bridal jewelry alone accounts for at least half of the gold jewelry market share in India.
- Investment and Hedge Against Uncertainty: Gold is seen as a safe haven investment, especially during times of economic and geopolitical instability. For instance, geopolitical tensions, such as the conflict between Israel and Hezbollah, have increased demand for gold as investors seek a safe-haven asset.
- Inflation Hedge: Gold is considered a hedge against inflation, preserving wealth when the purchasing power of fiat currencies declines. For every 1% increase in inflation, gold demand increases by 2.6%.
- Central Bank Buying: Central banks, including the Reserve Bank of India (RBI), increase their gold holdings to diversify forex reserves and hedge against external uncertainties. The RBI bought 19 tonnes of gold in the first quarter of 2024, already surpassing the 16 tonnes purchased in all of 2023.
- Weakening Dollar: When the US dollar weakens, it becomes cheaper for investors holding other currencies to buy gold, increasing demand and driving prices up. A weaker dollar boosts demand, as seen with the US dollar easing by 0.2% and leading to an increase in gold prices.
What is the present Status of Gold Resources?
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What are the negatives of buying physical gold for the country?
- Increases Trade Deficit & Current Account Deficit (CAD): Countries with high gold imports, like India, see a widening trade deficit, as more foreign exchange is spent on gold rather than productive assets. Example: In 2023, India’s gold imports surged to over $43 billion, contributing to a rising CAD (Current Account Deficit) and putting pressure on the rupee.
- Encourages Smuggling & Black Market Activities: High demand and import duties often lead to illegal gold smuggling, fueling the underground economy. Example: In 2022, 1,000+ kg of gold was smuggled into India, bypassing import duties and causing tax revenue losses for the government.
- Non-Productive Asset & Storage Risks: Unlike stocks or bonds, gold does not generate income and remains idle in lockers, reducing capital available for economic growth. Example: In Turkey, during economic crises, citizens hoarded gold instead of investing in businesses, slowing economic recovery.
Way forward:
- Promote Gold-Backed Financial Instruments: Encourage investments in Sovereign Gold Bonds (SGBs), Gold ETFs, and Digital Gold to reduce reliance on physical gold while ensuring capital appreciation and interest earnings.
- Implement Smarter Import Policies & Monetization Schemes: Rationalize import duties to curb smuggling and expand gold monetization schemes to bring idle gold into the formal financial system, boosting liquidity and economic growth.
Mains PYQ:
Q Craze for gold in Indian has led to surge in import of gold in recent years and put pressure on balance of payments and external value of rupee. In view of this, examine the merits of Gold Monetization scheme.(UPSC IAS/2015)
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