The World Gold Council (WGC), in a recent report, mentioned that the demand for gold may be more subdued than expected this year, following India's prolonged battle with Covid-19. "However, imports remain strong and retail demand is expected to pick up, as restrictions are gradually lifted across the country. In 2022, economic growth and the impact of pent-up demand for gold are likely to presage a period of robust demand, although any future outbreaks of coronavirus could create further uncertainties", it said.
India saw a boosted gold demand in Q1 because of a healthy rebound in the economy with GDP growth of 1.6% in Q1 2021, and lower infection rates. But the emergence of the second wave of Covid again affected consumer sentiment.
Rising income is the most powerful driver of Indian gold demand in the long term. This bodes well for gold demand as the economy is set to benefit from a demographic dividend.
Long term and short term drivers of gold demand
Considering long-term drivers, income is one of the major tools. According to WGC, for each 1% increase in gross national income per capita, gold demand rises by 0.9%, and for each 1% increase in the rupee-based price of gold, demand falls 0.4%. additionally, "Import duties and other taxes affect long term demand but the magnitude varies depending on whether gold is bought as jewellery or bars and coins."
Considering short-term drivers, according to WGC, "For each 1% point increase in inflation, gold demand increases by 2.6%, as gold is a hedge against inflation." While steady price increases or decreases affect long-term demand, sharp price changes have an impact on short-term demand. In addition to that, WGC added, "For each 1% fall in the gold price in any given year, demand increases by 1.2%. An increase in the rate of import duties since 2012 has depressed demand for gold by 1.2% per year."
WGC mentioned, "The IMF forecasts per capita GDP growth of 23% between 2022 and 2026. But while India is the second-largest consumer of gold, its per capita consumption is low. And demand faces challenges in the short term: from declining household savings rate and agricultural wages. Income may be the key long-term driver of demand, but it is affected by a variety of other factors, including policy measures. Support from such measures is currently lacking as policymakers view gold demand solely through the prism of imports. Meanwhile, industry efforts to improve transparency are not cohesive."
Indians are quite centered on gold jewelleries, and this accounted for more than 75% of the total demand for gold in India between 1990 and 2020. Gold jewellery demands are more influenced by long-term drivers while demand for gold bars and coins tends to respond more sharply to short-term factors, such as inflation or tax.