“Indian Economy and Gold Imports”
Shailendra Kumar
After my last two articles regarding the impending fall in Indian
gold consumption, there has been a flurry of emails. Frankly
I am surprised by the response. I did not know so many people out there would
be interested in Indian gold consumption. Now I stand corrected.
Since it is difficult to give response to so many individuals, I
would try to address them openly. It is easy to do so since most of the emails
are loaded with common questions like "Wouldn't the agriculture economy
pick up soon?", "Why does Indian economy look suddenly so bad?",
and "Wouldn't the Indian stock market rise soon to its former glory?"
Many readers have shown concern that the fall in Indian buying will downgrade
the outlook for gold prices. Many think that the reduction in Indian buying
will result in gold hitting back $600 levels. Some have even wondered what
would be the future of gold ETFs in light of the waning gold imports. Let us
look at some of these apprehensions one by one.
1. "Wouldn't the Indian agriculture economy pick up
soon?"
Most questions are about the state of rural Indian economy.
"Wouldn't the agriculture economy pick up soon?" "Wouldn't the
farmers be able to benefit from the rising agri-commodity prices and be able to
buy more gold?", "Wouldn't the boom in wheat, soyabean, and corn push
the farmers to visit the jewellery shops often?"
The answer unfortunately to all these questions is a clear NO. The
condition of the Indian agriculture is so bad that even a boom in the commodity
prices is not able to help the farmers. Even if the prices are up, the grinding
poverty forces most farmers to sell their crop too soon, too cheap, thus barely
allowing them to reap the real benefits of the boom. More, even if they realise
somewhat higher prices, they also end up spending lot of extra money on
costlier farm inputs, thus keeping their profit levels more or less at the same
level.
The condition of the farmers will only improve when the agriculture
industry gets serious attention from the federal and state governments. This is
not happening. In spite of 70% Indian population dependent on farming, the
sector gets least attention from government of any hue. Due to this the farmers don't have access to best seeds, proper
fertilisers and insecticides. Farmers travel for hundreds of miles to get good
quality seeds. Farm inputs are often in shortage; current agriculture season
has even seen farmers' agitations in many places because of shortage of
fertilisers. How the farmers will prosper if their time goes arranging seeds,
fertilisers and irrigation water. It is this state of farming which has
compelled thousands of farmers to commit suicide. Goes without saying, farmers
are unlikely to be thinking about gold and gold jewellery.
2. "Why does Indian economy look suddenly so bad so
suddenly?"
The fact is Indian economy was always in bad shape. It never was
what was being projected in mainstream media:
"the shining
In fact the weakness has been growing by
leaps and bounds during past two years. The rise of crude oil price has eaten
the Indian economy hollow and has in fact pushed the country back many notches
on its financial path. During past two years the cost
of crude imports has gone up from $40 billion to approx. $100 billion - an
unaffordable luxury for a poor nation like
Worse, the country is not passing on this rise in the crude oil to
the consumers; they are being shielded because of vote
bank politics. (While the Indian crude basket has risen by 181 percent since
April 2004, the retail prices of petrol have gone up just 29 percent until the
end of year 2007.) In other words, the government treasury goes on taking it on
its chin while the consumers are blessedly unaware about the rising prices. As
a result while on one hand the consumption continues
to grow unabated, on the other the country's finances continue to take a hit
below the belt. The balance sheet in fact is already in the red due to the
losses this country has taken on account of fuel subsidies, and even if the
crude price was to fall to a mere $100/barrel with immediate effect, Indian
economy would not be able to recover from the wounds it has already received.
Of course, the danger is not just limited to the escalating crude
oil price. The growing fertiliser subsidies are burning another hole in the
pocket. The government imports urea at Rs 31,116/ton and sells it for Rs
4,830/ton. DAP is imported at Rs 58,584 and sold for Rs 9,350/t. MOP is
imported at Rs 35,563/ton and sold for Rs 4,455. The amount of subsidy given by
the government has been climbing steadily over the years and today stands at a
whopping Rs. 119,772 crores (estimated for 2008-09) - almost three times higher
than the amount doled out during the previous year.
The surging oil, fertiliser, and food subsidies are likely to upset
the entire applecart of Indian finances. The annual DGGP growth at constant
prices is already in serious decline. Very strong revenue gains, which masked
many shortcomings of the economy in yesteryears, are also showing signs of
slowdown. And as if all this was not enough,
Not a surprise why the rating agencies
are out to issue negative numbers to
3. "Wouldn't the Indian stock market rise soon to its
former glory?"
How can the stock market revive when the very fundamentals of the
economy are shaking threateningly? How can the markets stay up when the rating
agencies are painting such a gloomy picture? Finally, how can the markets go up
when the government is out to curb growth and is focussing all its energy on
controlling inflation, already within a whisker of 12%? If inflation remains
quite high - as it is likely to be - the cost of capital will go up
dramatically. Already the Reserve Bank of
The rise in the lending rates is also hurting the retail customers.
Retail lending rates across most products - auto loans, personal loans, and
loans against securities - have been going up in recent past and are likely to
do so in the coming future. The customers are unable to borrow, thus capping
the demand as well as pushing up the loan defaults. (Bad loans have been rising
across most retail products in the past few months.) Goes without saying the
companies in
Not surprising why a recent survey of
corporates by RBI showed gloomy results. The latest industrial outlook
survey - a survey of corporates and businesses on the quarter ahead expectations - indicated that many companies were
uncertain about whether the overall business situation would improve during the
next quarter. The change in outlook had a lot to do with a worsening
macro-economic environment, marked by high oil prices, inflation and rising
interest rates.
Not a surprise either why the Indian
stocks have been falling like nine pins. The risk appetite of most sworn
bulls has reduced considerably. They have significantly slowed down their new
investments. No new money is entering the markets and even the old one is
desperate to get out. Dozens of mutual funds are sitting on huge piles of cash,
frightened to invest it in the stocks, and trying to smile while earning 8-10%
in debt instruments. There are funds which have raised
hundreds of millions of dollars and yet are unable to invest, simply
because they have neither the courage nor the conviction to call the current
level as "the bottom." FIIs, the underwriters of the boom just gone
bust, are also unwilling to scale up their purchases. They have sold about $6.5
billion worth of shares YTD, and are just unwilling to buy even those stocks which are 70-80 percent off their peak.
No doubt, the bottom is yet to show up. The FIIs are just not
selling because they know the market will tank. They know that there is no
other entity which can absorb their sales. (That a
mere $6.5 billion sale has sunk the stock indices by about 40 percent shows the
depth of the market and the strength of the economy.) Meanwhile the next round
of selling pressure may well come from domestic mutual funds, as the sustained
erosion in net asset values will prompt many of them to redeem their holdings.
Additional pressure on market indices will come when the retail investors are given a clear "don't buy" signal by the
brokerage houses. So far the brokerage analysts continue
to issue downgrades in terms of price targets, however it is a matter of time
before they in stead of merely reducing the price-earning multiple of the
stock, begin to actually start downgrading the earnings potential of the most
popular companies. They are forced to do so; the expenditure of most corporates
is flying sky high, given the escalated energy costs and the wage hikes as well
as the double digit inflation, and it is a matter of
time before their bottom-line end up in red ink.
So the simplest answer to the
question "Wouldn't the Indian stock market rise soon to its former
glory?" is: NO. The Indian market is not likely to revive, at least not
during next couple of years, possibly more. Leave alone the Sensex reaching the
former heights, it is a matter of time before it sheds its ill-gotten blubber
and ends up in four digit levels. It is my estimate that Sensex
which was at about 21,000 at the beginning of the year - and is
currently quoting at about 14000 - should settle down to 8000 within 6-9 months
from now. What's worse, I don't foresee any chance of
revival even from those lowly levels. Sensex will continue to remain in four
digit levels till the Indian economy recovers from the single biggest shock it
has taken during past sixty years: the rise of crude price. Since the recovery
will be extremely slow and painful, I fully expect Sensex to languish at 7-8000
for a period sufficiently long to make people averse even to talk about the
stocks and mutual funds.
In fact buying gold at current prices is the only course left for
Indian investors to salvage their stock market losses. However
they are unlikely to act it out. The ceaseless pushing of stocks and paper
assets during past two decades have clouded most Indian investors' psyche to a
level where they don't even consider gold as an instrument of investment. They
think of it as a soft metal good enough only for hammering out a nose ring or a
bracelet. This is the reason why the gold ETFs have failed in India, even as
they are a roaring success in the industrialized world.
The sum and substance: the Indian demand for the noble metal is
unlikely to pick up from now on. Given the condition of the Indian economy, I
would not be surprised that Indian imports soon - and it can be pretty soon - fall to about 500 tonnes from the current
about 700-800 tonnes per year. This may worry some gold mining industry
captains and some sworn gold bugs, but honestly they
should not be gloomy. There are many other factors out there to propel GOLD:
God's Own Currency.
© Shailendra Kumar.
Shailendra Kumar is the author of GOLD: God's Own Currency -