Indian demand for gold: Causes, implications and measures

Abstract

India is one of the largest consumers of gold in the world. But only 0.5% of the gold demand is met through domestic production. As a result, India imports large amounts of gold to fulfil the domestic demand. The rise in gold imports over the years has caused ballooning of India’s Current Account Deficit (CAD), leading to depletion of foreign exchange reserves. During 2011-12, India’s gold imports increased by 39% compared to increase in global gold demand (24%), causing the CAD to worsen from 3.9% to 4.2%1. The objective of this study is to understand the nature of gold demand in India, its relationship with factors like income and prices, and analyze the counter-cyclical behavior of gold prices with other economic indicators. Further, the measures taken by Govt. and RBI to curb gold imports would be studied. The main purpose of this is to investigate if the demand for gold in India is amenable to changes in policy, and to recommend other possible measures to reduce demand for physical gold.