Impact of the West Asian Crisis
The ongoing West Asian crisis has led to a global energy shock, prompting Indian Prime Minister Narendra Modi to urge citizens to reduce petroleum consumption to conserve foreign exchange reserves. He suggested measures such as reviving COVID-era practices like work-from-home, avoiding non-essential foreign travel, and limiting gold purchases.
Macroeconomic Concerns
- The depreciation of the Indian currency, which dropped to a record low of $95.63 against the US dollar, has been exacerbated by rising crude prices above $100 per barrel.
- Gold imports, a significant component of India's import bill, can widen the Current Account Deficit (CAD), impacting foreign exchange reserves and economic stability. This is particularly concerning during times of external shocks.
Gold Import Dynamics
- India imports approximately 750 tonnes of gold annually, with domestic production only about 1.5 tonnes, creating a persistent macroeconomic challenge.
- Gold import value rose by 25% to $71.97 billion in FY26, despite a decrease in volume. This increase was driven by a 40% surge in gold prices.
Challenges from Trade Agreements
- The trade agreement with the UAE led to increased gold imports, benefiting from a more favorable tariff structure for bullion over doré.
- This skewed import structure limits opportunities for domestic value addition and inflates the import bill.
Potential Alternative Sources
- Countries like Argentina, Peru, and the Dominican Republic supply gold below average import costs, but they represent only 15% of India's imports.
- Emerging sources such as Colombia, Japan, and Taiwan are seeing growth in gold ore and compounds imports, indicating potential diversification.
Refining Ecosystem and Global Integration
- India's gold refineries are underutilized; with only one LBMA-accredited refinery, integration into global markets is limited.
- Refineries face financial and operational challenges, including high working capital needs and regulatory complexities.
- Countries like Switzerland and Hong Kong have leveraged refining capacities to become major gold exporters, unlike India.
Policy Implications
- Duty structures historically haven't incentivized refining due to narrow margins between doré and refined gold.
- The Trade Watch Quarterly report highlights that the number of refineries increased but they remain small-scale, hindering economies of scale.
