India’s Gold Industry Is On The Cusp Of Transformation

In an exclusive interview to Solitaire International, Somasundaram PR, managing director – India, World Gold Council, sheds light on the new gold policy, contemporary challenges and an exciting future filled with innovations

Somasundaram PR, managing director – India, World Gold Council has been always the leading voice of the Indian gold industry. A staunch advocate of a progressive policy for the trade, he explained how it can augment demand, promote development of the gold market, increase employment opportunities, spur exports and enhance consumer protection – making it a win-win proposition for the entire ecosystem.

Somasundaram PR, Managing Director – India, World Gold Council. Photo © 2017 Ben Hider

What are some challenges prevalent in the Indian gold market?

The Indian gold industry’s growth has been impressive since the withdrawal of the Gold Control Act in 1990. Despite its significant size, it has remained a fragmented, largely unorganized, sector with significant untapped potential. With an annual demand of approximately 800 tonnes to 900 tonnes and a market size second only to China, India still lags in infrastructure and standards. It has not leveraged its buying power to have any influence on the global gold market. There is a pressing need to reform India’s gold market. There is serious lack of standards affecting integrity of gold, very low mining and limited recycling of household gold restricting the growth of domestic gold market and resulting in the majority of demand being met through imports. Additionally, there exists a large segment of unorganised trade (over 60%) with a complex and fragmented supply chain, with varying degrees of compliance. Higher taxes on gold and short-term outlook and frequent tax changes hinders confidence of the trade in making investments behind innovation and exports.

Will the new gold policy resolve these challenges?

A comprehensive gold policy that addresses both opportunities and challenges, would be a prime enabler to ensure that the economic benefits of gold are amplified and visible. A stable policy environment and an integrated approach to domestic and export is critical to alter the role of gold in the economy – from being perceived as a negative asset impacting tax transparency to one that is a compliant mainstream asset with significant potential to protect wealth and boost economic growth. In the absence of such a policy, frequently, short-term policy interventions in the form of import curbs have been made, leading to unintended consequences including smuggling and tax evasion, which keep the industry from becoming progressive and mainstream. Effective reforms could create impact at multiple levels; grow demand without creating macroeconomic instability, promote orderly development of the gold market, increase employment sizeably, spur investments in value added manufacturing, boost exports and enhance consumer protection.

When do you expect India to implement the new gold policy? How are the stakeholders making a collective effort to ensure it is rolled out at the earliest?

Further to budget announcement about a comprehensive gold policy in 2018, NITI Aayog released a comprehensive report to transform India’s gold industry. With industry support, we have published blueprints on specific recommendations like gold spot exchange and bullion banking. We believe 2020 will see phased introduction of further policy measures designed to increase transparency in gold as an asset class. We expect policy-led and industry-led initiatives that will reflect a marked shift in the next three years towards making the industry better organised.

How will the jewellery manufacturing and retailing segment benefit from an organised, transparent gold market?

Gold is a global market and Indian handcrafting is an untapped opportunity in this area. Enhanced consumer trust, more investments, easy access to finance, better innovation and greater reach will be some of the benefits of an organized market. The risk of remaining unorganized in an increasingly global market is too well known to need re-statement.

What would be the potential revenue of India’s bullion banking operations once up and running?

Bullion banks are, and continue to be, a key pillar of the gold market – they build greater trust across the gold value chain, drive efficiency, provide liquidity, promote transparency and support price discovery. The result is that customers can participate in the bullion market with confidence. Several countries, including the UK, US, China and Switzerland have fully functional, well-organised bullion markets. In these countries, participants access the bullion market through bullion banks. Bullion banking has the potential to generate massive revenues, primarily from interest from financing activities, and brokerage and fee income from sales and trading activities.

In 2017, revenue from global bullion banking operations was estimated at US$ 1.5-1.8 billion. The revenue potential of each bank differs according to the breadth and depth of services offered. While tier I banks such as UBS, HSBC and JP Morgan each generate revenues of US$100-250 million from bullion banking, smaller, tier II banks generate revenues of less than US$50mn. The development of an effective bullion banking industry in India will require real commitment from both banks and policymakers in seeking to create a viable domestic bullion banking market. Apart from substantial revenue, increased bullion demand should also result in significant job creation. It is estimated that higher manpower requirements could create an additional 15,000-25,000 jobs.

How can mandatory gold hallmarking across India benefit the trade?

India’s gold industry is at the cusp of transformation, as transparency, standards and infrastructure begin to define the next phase of reforms. Making hallmarking mandatory is a much-awaited progressive step to safeguard the interests of the consumers, particularly women, who put their hard-earned savings into this asset class. This reform should be backed by a tight enforcement mechanism and has potential to enhance trust in Indian gold jewellery, thereby enabling a favourable environment to market our famed handcrafting skills appropriately. Employment potential in assaying and hallmarking will increase.

Hallmarking will also create a level playing field, benefitting small players. The transition time of one year will allow the industry enough time to sell the existing inventorywhile simultaneously, plugging any gap in infrastructure or making suitable changes in logistics. To make this a smooth success, government and the industry players should also create a strong consumer pull, through consumer awareness campaigns.

How is WGC ensuring that gold jewellery has top-of-mind recall amongst consumers? Will it revive its highly successful jewellery-related promotions in India like Gold Expressions, Azva, etc.?

Our strategy changes from time to time depending upon the needs of the market. Currently, the priority is to make sure the future of this industry is aligned to the broader economic agenda. To this end, our current efforts are focused on working with stakeholders for a stable policy environment.

Will WGC focus purely on investment-driven demand?

There is no difference between investment-driven demand and jewellery. In India, gold in any form is an investment and our households understand that like any seasoned economist. We are building marketing support and a strong case for gold through industry events and digital platforms such as MyGoldGuide.

Almost all efforts to smuggle gold into India stem from the government’s efforts to curtail its import. How can the country balance the cultural affinity for gold with macro-economic pressures?

India’s per capita gold consumption, despite being a large gold market, is low at less than 0.50 grams, lower than many advanced countries that have sophisticated financial markets. This speaks of a large pent up demand at the lower end of the economic hierarchy. As more people grow out of the subsistence level to become middle class, their desire to hold gold will only drive demand. A 1% increase in income leads to a 1% increase in gold long term. So, instead of trying to curb demand, we should look at ways of making gold more accessible through banks so gold savings happen through the banking system -which can put this to use just as any other savings. Supporting innovation in gold through a massive tech programme on gold, promoting exports and reviewing India’s untapped gold mining opportunities are ways we can balance the macro-economic pressures. GMS and SGB need to be made more flexible and that can add ease supply side pressure – besides making the market more organised.

Despite being the second biggest gold consumer, why does India have such little influence in the global market, in terms of setting the gold price?

This has to do with a limited purpose and inconsistent policies so far. It tended to focus on just controlling imports rather than leveraging gold as an asset class, one that promoted savings at all levels of the social and economic hierarchy.

What innovations can we expect to see in the Indian gold market over the next five years?

We can expect innovations in both investment products and jewellery. This will be led by digital trends, bullion banking and technology integration into the jewellery lifecycle – covering manufacturing, selling, marketing, storing, usage and recycling.

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