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India and its association with gold

Until 1990, the Gold Control Act prohibited the private holding of gold bars in India. There was physical investment in smuggled ten tola bars, but it was restricted and often amounted to keeping a few bars ready to be made into jewellery for a family wedding. Gold investment fundamentally was in 22 carat jewellery.


India is the world's chief consumer of gold. According to GFMS, in 2001 it absorbed around 700 tonnes from the world market, compared to just 320 tonnes in 1994; that is without taking into account the recycling of scrap from the huge stock of close to 10,000 tonnes built up on the sub-continent in the last few hundred years, or gold imported for jewelery manufacture and re-export.

A past perspective is useful in understanding why India has been for so long, and still is, a great market for gold – and also for silver. India, as the saying goes, has always been 'a sink for precious metals'. Both metals are closely woven into the social fabric, particularly in the rural areas where they are the basic form of saving.

Ever since Roman times the 'east' has been a foundation of silk and spices, and later diamonds, tea and cotton, sought by Mediterranean and European merchants. The first gold ducats struck by the mint in Venice in 1285, which became a staple form of global payment for over three hundred years, went to the Levant and on to India.

The silver and gold from the Americas, after Columbus discoveries, mostly just passed through Spain on its way to the east. In the 17th century the Dutch and English East India companies sent gold and silver to India and Java to pay for the goods. The English East India Company shipped 20 tonnes, almost three years' world output then, to India between 1660 and 1690. Mocatta, the oldest member of the London gold market, first sent gold to India in 1676 to pay for diamonds, the beginning of a long relationship between London and Mumbai merchants. During the American Civil War in the 1860s India imported approximately 420 tonnes in payment for cotton exports because of disrupted American cotton crops. Only once has India been a important dishoarder, when 1,244 tonnes (40 million oz) was shipped out in the 1930s due to distress selling from famine and the new high price for gold (up from $20.67 to $35).

In recent times India has remained realistic to gold. While demand has improved substantially since the early 1980s due to general economic growth, annual consumption is dictated both by the monsoon, with its effect on the harvest, and the marriage season. In an auspicious year there are upwards of ten million marriages, at which between 20 and 200 grams might be worn by the bride. The status of a family in its community is still judged by the gold exchanged as the bride's dowry.

The official import of gold into India, however, was barred from 1947. With domestic production of less than two tonnes from two small mines, Bharat and Hutti, together with recycling, the main demand was met by smuggling from the regional markets of Dubai, Singapore, and Hong Kong, usually as ten tola bars, uniquely preferred in India. The smuggling was a very professional business, involving up to 200 tonnes encouraged by a premium of 30 per cent over the London price. Over 3,000 tonnes has penetrated India unofficially since 1947. In the 1990s, though, deregulation of the market has finally taken place, ushering in the modern market of today.

Reserve Bank of India

Since 1990, investment in small bars, both imported ten tolas and locally-made small bars, which have proliferated from local refineries, has raised substantially. GFMS predict that investment has exceeded 100 tonnes (3.2 million oz) in some years, although it is hard to segregate true investment from stocks held by the 16,000 or more gold dealers spread across India. Certainly gold has been used to conceal wealth, especially during the mid-1990s, when the local rupee price rose steadily.

It was also augmented in 1998 when over 40 tonnes (1.3 million oz) of gold from bonds originally issued by the RBI were restituted to the public. In the cities, however, gold has to race with the stock market, investment in internet industries, and a wide range of consumer goods. In the rural areas 22 carat jewelery remains the essential investment.

The Gold Deposit Scheme

The government declared a new initiative in its 1999/2000 budget to tap the hoard of private gold in India by allowed commercial banks to take gold deposits of bars, coins or jewelery against payment of interest. Interest levels can be set by each bank, and deposits must be for 3 to 7 years. Interest and any capital gains on the gold will be exempt from tax. The banks can lend the gold to local fabricators or sell it in the Indian market or to local banks also. However, the depositor has to declare the origin of the gold so that metal bought illegally to conceal wealth cannot be deposited. The State Bank of India was the first one to accept deposits. To date, the amount of gold collected under this scheme (less than 10 tonnes or 0.32 million oz) has fallen well undersized of the 100 tonnes (3.2 million oz) that was mentioned when it was launched.

Evolution of Modern Gold Market in India

The introduction of a modern gold market in India : In the year 1990, abolition of the long-standing Gold Control Act, which had prohibited the holding of 'primary' or bar gold except by authorized dealers and goldsmiths and sought to limit jewelery holdings of families.

Imports were then permitted in three stages :

• 1992 Non-Resident Indians (NRIs) on a visit to India were each permitted to bring in up to 5 kilos on payment of a small duty of six per cent. This allocation was increased to 10 kilos in 1997.
• 1994 Gold dealers could bid for a Special Import License (SIL) which was issued for a mixture of luxury imports.
• 1997 Open General License (OGL) was introduced, paving the way for substantial direct imports by local banks from the worldwide market, thus partly eliminating the regional supplies from Dubai, Singapore and Hong Kong.
The OGL system has also basically eclipsed imports by NRIs and SILs. Furthermore, important temporary imports are permitted under an Export Replenishment scheme for jewellery manufacturers working for export in designated special zones.

In 2001 unofficial imports knock down because of a reduction in import duties, pushing down the local premium and making smuggling less profitable. Ten tola bars are still the favored form of gold in India, accounting for 95% of imports.

The Bombay Bullion Association, founded in 1948, was the major forum pushing the government for modernization of the market. It publishes a monthly bullion bulletin.

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