MINI PROJECT ON

MANAGERIAL
ECONOMICS(MS-
5103)

Submitted by: Deepraj Paul

Roll: 12{2050112}
MBA, 1ST SEMESTER
 MAIN ISSUE

India is the global leader in consumption of gold. Around 53% of the gold in the world market is
used for Jewelry from which 80% is used for making jewels in India, which is followed by 20%
as Individual holdings such as ETF’s (Exchange Traded Funds) and others are Unaccounted.
Another 21% are kept as reserves by the Central Bank, which is RBI for us, and remaining 14%
is used for Industrial work such as components in electronic devices like cell phones, televisions,
and GPS units. The other usage of gold is dentistry, medicines, aerospace. It is also used in
making Medals and the making of crowns as it is considered as a valuable thing to own. Though
Gold falls in list of Luxury Goods, people try to buy as much as they are willing and able to
purchase especially in occasions like Dhanteras, Weddings and Festivals. The change in trend
and the introduction of new celebrities also impacts hike in consumption. In the Microeconomic
scenario, Gold is considered to be the wealth preserver and a king of lifelong savings due to its
increase in value or appreciation nature over a period of time. The trend clearly shows how it
hiked the wealth of the Individual and the economy. In the Macroeconomic scenario, Gold stands
at around $39.2 billion of our total imports which is immediately next to Crude Oil and Capital
Goods from the largest producers of Gold globally. They are Russia, USA, China, Australia, and
South Africa. We make payment them in their respective currencies. To make payments in US
dollars, we have no option than to sell our Indian Rupee at cheaper rates to the buyers.
In a nutshell, consumption of gold is not an issue, but having so much of gold doesn’t help in
economic development of a country. It just lies down in bank lockers and in almirahs. Imagine
this amount of money being invested in government projects and stock market. Companies and
central government would have had so much of money in their hand to make good investments,
which would indirectly increase our GDP and overall development.
 Demand and supply dynamics of gold in India over the 5 years

The gold demand in India was at around 675.55 tonnes in the year 2016 if compared to 857.22
tonnes in the year 2015 - a decrease of around 21.1%, according to World Gold Council on.
Then, Demand of gold skyrocketed and grew up approximately by 9% to 727 tonnes in the year
2017, says WGC. India's complete year gold demand in the year 2018 was at around 760.4
tonnes. India's gold demand for the full-year 2019 is 690.4 tonnes if compared to 760.4 tonnes
in 2018, reduced by approximately 9 per cent, according to World Gold Council data.

From the above data, we can easily figure out that the law of demand is not working in this
scenario, as law of demand states that with increase in price of a commodity, the demand falls.
But here in case of gold, when the price goes up, it doesn’t show any big effect on demand of
gold, as it is continuously increasing. The law of supply states that when prices goes up, supply
also goes up.
Clearly, the demand, price and supply have a positive correlation with each other. With
increase in price, the supply obviously increases and hence, the demand also increases. Thus,
supply and demand have a positive relationship with each other (Considering all the other factors
constant).

Factors (of the demand function) that influence the demand for gold the most

The demand function states that

D(x)= f {P(x), T, M, P(o)}

Where,
o D(x)=demand of a commodity
o P(x)=Price of the commodity
o T=Taste and preference
o M=Money income
o P(o)=prices of other commodities (substitutes or complements)

Clearly the taste and preference, the money income of the people in India, the price of
other commodities like silver and platinum makes a huge difference in buying of gold.
But the change in price doesn’t really make a big difference in buying of gold. People of
India will buy gold regardless of the price when it comes to festivals or weddings. Gold is
inseparable from these events.
Money Income plays a really vital role. India’s GDP was continuously growing from
2016 to 2018, and so was the demand of gold, but suddenly after the demonetization and
introduction of GST, the GDP fell miserably in 2019 and so was the demand for gold. So,
we can interpret that money income (per capita) and GDP, and the overall economy plays
a big role in demand for gold.
Sometimes, we can also say that this one-sided game of Gold in India can also be because
of costly platinum which could have other option instead of gold. But the people of India
cannot really afford platinum, due to which they have to go with Gold. Silver’s status
symbol is weak and considered as a cheap utensil, due to which people do not prefer
silver and again, chooses gold. Due to the good status symbol associated with gold as
well as not overpriced like platinum, the gold’s taste and preference has been constant
and will keep growing with population and growing purchasing power of India.

How the demand trend abides by or contradicts the law of demand

Let’s take the case of 2015, in which total demand of Indian consumer is 857.2 tonnes of gold at
the price of 26343(per 10gm). In the year 2016, total demand of Indian consumer is 675.5 tonnes
of gold at the price of 28623(per 10gm) and therefore law of demand is satisfied here. In the year
2017, total demand of Indian consumer is 727 tonnes of gold at the price of 29667(per 10gm)
which is again an exception. In the next year in 2018, total demand of Indian consumer is 760.4
tonnes of gold at the price of 31438(per 10gm). In the year 2019, total demand of Indian
consumer is 690.4 tonnes of gold at the price of 35220(per 10gm).
So, from the above graphical data, with the increase in price, the supply also goes up, but the
demand varies, depending on many things. Price has consistently increased over the last 5 years,
but the demand was also growing from 2015 to 2018 with the growing price which contradicts
law of demand, after which, India’s GDP fell in 2019 with the per capita income, and hence the
demand of gold. But, if we look closely, the law of demand doesn’t hold here in most of the
time. Gold is clearly an exceptional case for Indians. Also, if we keep all the other factors
constant, with continuous increase in price, from the year 2016, the demand keeps on increasing,
which contradicts the law of demand. Hence clearly, gold is an exception.

Price elasticity of gold over the years

Price of commodity changes the degree of level. The gold product is not affected directly in the
demand because it falls in a luxurious set of goods. Gold prices have been increasing this year
and this is the news that dominates in newspapers. The last time gold prices hiked at such speed
was in around 1980. In fact, gold price never touched the heights they had reached in 1980 and in
fact were at their lowest in the year 1999. The very important point is to be focused is that both
gold and oil prices rise or shrinks together both were at their peak in 1980 and while oil has
become far costlier that it ever was, gold prices still not a very high compare to where they were
in 1980.

Another point to focus is that gold prices elasticity is negative. Higher the gold’s price, greater is
the gold’s demand. This is a uncommon feature of gold, as many other products whose prices
hikes, sees decrease in demand. When prices hike the most than the demand is the highest,
pushing the prices further. In the year 2007, gold prices hiked up by nearly 19 % compared to
price in 2006. Demand for gold went up by nearly 4.98 %. when people say prices hike, they
normally tend to consume less of the good, including essential items like oil and petrol. The
nominal price always stays above the previous price; that is why, gold is never seen as a potential
risky investment compare to real estate, the share market, and the money market.

Gold is a rare metal. It has been the most stimulating metal for thousands of years. India is a
developing country because of income hike in the country leading to higher purchases of
jewelry. When the recession subsides, and the industry looks up and real estate’s prices rise
again gold price should come down from the heights they occupy today.

All these makes gold a very safe investment. Because gold prices don’t decrease in nominal
terms. However, as the economy gets better and other forms of investment become handsome,
the return on gold comes down drastically and may in real terms become negative sometimes.
However, jewelry has an emotional value attached to it too, therefore even when price comes
down, people remain stable with their gold purchases. Buying gold makes sense during the time
when the rest of the economy is struggling, but when economic growth and industrial growth is
attractive like in India now, investing in gold might deliver the low returns that one could have
obtained. However, this return is in all likely is risk free, therefore it makes sense for those who
likes to live risk free. It is very important to remember that greater the risk, greater is the rate of
return for any investment. Eventually, it is simply explained when the price of the product has
increased, then the gold is not affected because it is the type of investments in the market and it
always gives positive return. So, it is future oriented investments which has always given better
and high return to the customers with minimum risk.

The major advantages of the gold and not affected price as follows: -

o They have always given positive return to the buyers

o It is the investment for future benefits
o They have always given positive growth price in the markets.
o The price cannot affect to buy that product.

CONCLUSION

In the demand and supply of gold in India, I analyze and learn that official selling will fill the
boots to trend following speculation in the gold market and the gold price will go back to its past
trading range. The world recession and strong US currency which curb gold, jewelry and bar
demand have been helping the ability of the official sector to keep the gold price low.

The forces for higher gold price will hike. Though it may not happen over the short time, in the
long time the dollar will fall and considerable in my view. A dollar decline will lower than the
price of gold in countries outside, which will in turn arouse price elastic demand. The pressure of
not having strong hold may also move official sector attitudes towards holding gold as a reserve
asset relative to the currency. Many central banks in the world feel not comfortable with the now
higher share of currency in their official reserves. The high and ever-increasing internal debt of
India growing prospects of inflations. The central bank has begun its objective of decreasing its
high reserve holding of money, and it may be noteworthy that they have reported the first rise in
central bank gold holding in upcoming years. As long as currency holding remains rigid, central
bank have felt no pressing need to address their high money holding, but an eventual reserve in
the money exchange rate may change the thinking. The supply also hikes the gold price.

At last, it shows that the price of the gold if increases or decreases then it doesn’t really have any
effect on the demand and supply of product because it is the investment which gives always
benefits to the customers, due to previous record which was explain in previous paragraph and
cover that price cannot have effect on demand and supply of gold in India.

The effect of Coronavirus pandemic on Banking sector

The Indian economy was not growing rapidly or steadily even before the Covid-19 outbreak,
which has only made things worse. From 2019, GDP was continuously not achieving the target
percentages. GST collected which was promised to generate 1 lakh crore per month was not able
to generate the targeted amount. The report by the RBI’s committee on a unique resolution
framework, which was headed by former CV Kamath, explains this clearly. The report depicted
that the COVID-19 pandemic has tried to destroy the businesses that were not in good shape
financially even before the outbreak. They believe that banks may be risk-friendly to restructure
loans this time, because banks have these experiences and have already suffered big losses in
previous restructuring efforts. Businesses which were not doing great and were in state of
becoming and declaring insolvent and bankrupt were the most effected businesses. We have seen
how the business-like Tesla, Adani and Reliance have grown up in this COVID-19 year, which is
astonishing.
Banking sector have hugely been affected due to COVID-19.
Reasons explained in following points: -

o Restructuring of loans:

o Loan moratorium facility has to be given to all the people who are in debt and cannot
give their due timely due to lockdown, which seems a fare reason. But banks have been
affected badly as they won’t be getting money in right time and there is also a risk of
those money being trapped permanently and becomes NPA.
 o No business in lockdown:

o We all know that the majority of income of banks come from loans which the bank didn’t
give sufficiently due to lockdown, and hence made less money and business. Indian
banking sector was already struggling, the stock price of banks depicts the condition of
Indian Public sector banks.

o Unstable market condition:

o Due to reduced interest rates on loans and not really good business in lockdown, the
GDP fell and went into negative for two continuous quarters which shows the current
condition of market. Although, from the last month GDP has shown some hope, but
experts are saying that it was just because of the festive seasons. Because of all these
many banks are failing, and recently Lakshmi Vikas bank was about to surrender but RBI
managed to keep the situation stable by merging it with Singapore bank.

These were all the negative effects of covid19 pandemic.

But there was also a very good positive impact which was:

o Digital Banking:

o As people feared to step outside their home, they decided to involve in digital banking
more. Also, the people who have never tried instant money transfer apps like Gpay and
Phonepe, have also tried these apps and learnt how to use this. The digital payment in
India has drastically increased which is a very good thing for Digital India Initiative.

o Buffer time:
o Banks and Financial Institutions were always occupied and never had enough time to
look into their business model and develop them. In this pandemic, all the businesses,
either it is banking or any business, everyone had gotten a chance to look deep into their
business model and developed ways on how to be better in their business. Like HDFC
bank had a long problem in their IT section which they have almost resolved now. Now
is the right time to invest as the share market and the Sensex and Nifty are in all time
high, showing some good time in the last few days of 2020.
 How the country’s economy
can be recovered from the present crisis:

Obviously, India had lost its way in terms of reforms in structural ways that it needed to make to
keep the economy growing at 7% or more. Lockdown was not really a feasible option for an
economy like India. In fact, the best would have been rigorous tracing, testing, and quarantining.
This strategy would have been far better. Following points are listed below:

Firstly, the procedure of restructuring balance sheets of non-financial firms needs to resume and
made faster. Bankruptcy as restructuring is problematic and expensive, but much less so than
bankruptcy as liquidation, though in some cases, the last one is the best way to opt. This
procedure will allow financial firms’ balance sheets to be cleaned up, and new lending to resume
more structured and organized way.

Secondly, the RBI needs to find out how to improve monetary policy transmission, especially if
it is to do any kind of inflation targeting. In this matter, the use of an inflation measures heavily
affected by food prices, when agricultural markets are highly regulated and subject to volatility
and manipulation, is hardly ideal. Here, the push for domestic agricultural marketing reform will
help a little, but improving production conditions, risk management for farmers, and
international trade as a stabilizer will be significant and welcoming.
Third point is India will only grow rapidly, steadily, and sustainably when industries and the
MSMEs beings to take off. Including Information technology in all its various forms as part of
industries. The pandemic has pushed the increasing role that digital technology was already
playing earlier in the economy. Whether for marketing, service delivery, or education, finance,
digital world has the potential to allow for leapfrogging and rapid growth. In this respect, the role
of public investment in digital platforms and infrastructure has been key, and instead India is
relying on near-monopolies in many parts of the digital value chain.

The fourth point is, investing more on solar power projects and usage of renewable source of
energy. Trying more on how to import less and export more. Especially, in the agricultural
sector. India is an agricultural nation. If proper and better technology is provided to farmers at
cheaper rates then they would give a good return and make more crops, grains and vegetables
which could be exported to our neighboring countries and thus, help increase our GDP.

The fifth point would be associated with our behaviors. Not go with buying foreign products and
instead, buy products whose country of origin is in India. Product could be anything like an
automobile, a mobile phone, or a piece of cloth etc. This behavior would help the people of our
nation and they would get the benefit after we purchase from them. This would help our people
to grow and help in GDP. Like buying a sports jacket from Adidas is always a fancy idea, but
what will happen if we buy a sports jacket not from a foreign brand like Adidas and instead from
HRX which is an India brand? Lot depends on our behaviors. We need to change first to help our
country grow.