India should fear exodus of gold jewellery makers to China
As it released a new China gold market study, the World Gold Council suggested India was on a path to losing gold jewellery manufacturers to a neighbour.
Posted: Tuesday , 15 Apr 2014
Mumba (India) -
At a media briefing in Mumbai the World Gold Council (WGC) warned that India risks losing gold jewellery manufacturers to China if the Indian government continued to keep curbs on gold imports.
"There are just too many rumours doing the rounds - that India's jewellery manufacturing base could actually shift to China, given the latter's enthusiastic policy reforms," said P R Somasundaram, the World Gold Council's managing director for India. "The (Indian) government needs to realise that the entire jewellery manufacturing industry could move shop if adequate steps to institutionalise bullion trade across the country are not taken in a hurry."
Somasundaram made the comments as the WGC released a new report on the Chinese gold market which highlights the country's emergence as the largest consumer in the world of gold.
"Given the appreciating renminbi and $7.5 trillion of bank deposits (in China), as against India's depreciating rupee and $1.2 trillion of bank deposits, gold demand in China is likely to remain robust, and almost similar to India," Somasundaram said.
China's gold demand has quadrupled in a decade, putting it in the top consumer spot ahead of India with strong demand in sight. The WGC predicted continued growth in coming years driven by China's growing middle class.
Somasundaram also said that while gold was a major contributor to India's current account deficit (CAD), "by curbing gold imports, India has opened unofficial channels for meeting consumers' appetite. Through curb on gold imports, India has lost (valuable) tax income."
Although the cost of manufacturing in both the nations "works out the same," Somasundaram noted, "China has a long term gold import policy, which India currently does not have.
"In fact, a number of Indian companies have lined up massive investment plans in China for manufacturing and exports of gold ornaments. They are just looking for more policy reforms in China, and a revival in global jewellery demand."
The Council has noted that China has overshadowed Indian jewellery manufacturing sector through mega-policy reforms. Somasundaram said that although the shift of jewellery manufacturing from India to China has not reached alarming proportions - so far - jewellers were seriously weighing their options.
The potential for the move increases with China proposing to set up a free trade zone for the gold industry in Shanghai, to attract foreign investment in bullion. Somasundaram said this was one policy decision that was going to curry favour with most investors.
China has also granted a licence to two large banks - HSBC and ANZ - to import gold and ensure supply at the free trade zone. The nation also has 600 operating mines and produced around 437 tonnes of gold last year.
As to whether India could regain its position as the largest gold consumer if curbs were lifted by the new government, Somasundaram asserted that there did not exist a stated policy in India to enable the country to leap frog to the top slot.
The Reserve Bank of India (RBI) regulates only 40% of the gold market in terms of import and export, while the remaining 60% remains unregulated. "While the RBI controls 40% of the trade that happens in the banking sector, there is no clear cut policy to boost bullion trade," Somasundaram said.
Moreover, with over 500,000 plus registered Indian jewellers not coming under the direct purview of the RBI, there could be no certainty in their claims of the purity of gold that they sell to consumers, he noted. In comparison the Chinese government regulates the entire jewellery market, and over 100,000 jewellers deliver pure gold to their consumers. Somasundaram noted this was all the more important since China opened its gold market only early 2000, while India opened its market in the 1990s.
The MD said that the government of China had also permitted trade in paper gold by allowing three gold exchange traded funds, in addition to the announcement of free trade zones for gold jewellery manufacturing.
All these measures are set to translate into China maitaining its lead in gold conumption.
"China has stepped up its efforts to make the country a price-setter. Its futures market, the Shanghai Futures Exchange, has flourished with its gold trade. Though the current gold holding with Chinese banks has declined to 1% of foreign currency reserves at present from the 2% in 2009, assuming that forex reserves go to 2%, one cannot even imagine what will happen to China's gold demand," said Somasundaram.
He added that China had recently launched a gold accumulation plan, similar to the one offered to jewellers in India.