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28 March 2024

Shine rubs off gold in rural India

Published
By Reuters

India's gold demand will take a hit as increasingly prosperous rural consumers switch to other investment options and step up spending on discretionary items, setting the stage for China to overtake its neighbour as top consumer of the metal.

The Indian buyer has traditionally invested in gold as a hedge for bad times, but with prices of the metal soaring and a wave of strong economic growth swelling the country's middle class, demand for consumer durables and appliances has spiked.

Gold prices in India, which imports all of its metal in the absence of major domestic mines, hit a record high of 20,924 rupees per 10 grams($463) on Dec. 7.

"People in the rural areas are looking to diversify their portfolio to seek better returns," said Prithviraj Kothari, head of trade body the Bombay Bullion Association, which has 400 members.

"With prices so high and banks giving an interest rate of 8.5 percent on deposits, they would prefer to buy other items. Gold sales would take a hit."

Demand for gold from rural areas that account for about 70 percent of annual consumption, which averages 550 tonnes, is likely to fall to 50 percent in coming years, industry watchers say.

"With the government keen to make more savings avenues available, rural consumers would consider the newer instruments, taking away money from gold," said Pinakin Vyas, assistant vice-president with IndusInd Bank, a large gold importer.

By March 2012, India's central bank aims to have a bank branch or roll out access to financial services in all villages more than 2,000-strong, its chief Duvvuri Subbarao has said, potentially diverting savings away from the precious metal.


DISCRETIONARY SPENDING SPURTS

"Rural consumers are now more aspirational in their discretionary purchases, and even companies like Maruti and Hero Honda have done well as far as their sales contribution from these areas is concerned," said Vaishali Jajoo, an auto industry analyst at Angel Broking.

Sales of automobiles and consumer durables rose 38.8 percent in the period from April to September, outstripping gold sales, which grew by a meagre 14.6 percent. India's gold imports hit their lowest level in more than ten years in 2009.

Makers of consumer durables and car producers have all turned their attention to the rural buyer in a bid to diversify their customer base outside fast-saturating urban markets.

"Sales of large domestic appliances and cars have grown exponentially and this was seen during Diwali itself, while gold sales have not kept pace with this rise," said Daman Prakash, director, MNC Bullion, a large gold seller.

"Volumes have been stagnant due to record high prices. I am at a loss to understand how to compete with lucrative offers made by makers of domestic appliances to entice customers."