In India, Cash Crunch Dims Gold’s Luster

The cash crunch in India is having a direct impact on many sectors, prevalent among them jewelry retailers. As Bloomberg noted, “sales are plunging.”

The backdrop is well-known. Many industries, including the jewelry industry, rely on cash for transactions. Many retailers, reported the newswire, are not able to process credit card transactions. And in November, sheer supply of cash was whittled down drastically, as the government took roughly half of the physical store of notes out of circulation, part of a wider plan to crack down on corruption and help improve tax collection. And yet toughly 98 percent of transactions rely on cash changing hands. Demand for gold has fallen by the wayside as costs of the yellow metal climbed and in the wake of farm income eroded by a weak monsoon season, said Bloomberg.

Consumption of gold in India has, in fact, slipped to a seven-year low last year, said the World Gold Council. That has had an outsized impact on markets, as India is the second biggest market for gold, behind only China. Total consumption in India stood at 650 to as much as 750 metric tons, a 24 percent slip from the year before. That decline will continue into the current year, as imports are being hit, and per forecasts from Kotak Mahindra Bank, the import level will be between 350 to 400 tons, off from 575 tons in 2016. Other estimates, from the India Bullion & Jewelers Association, find that a recovery in demand may take six months.

The buying power of rural residents – who buy 60 percent of the jewelry that changes hands in India – has been curtailed as they use cash for everything from food to weddings (and weddings, of course, translate into jewelry buying, normally).

Additional government scrutiny might impact demand for gold in India, as well. The Modi administration has targeted imports by gold deposit initiatives and coin sales, and by boosting taxes – and it is the latter that has helped make gold more expensive and has pinched demand.