INDIAN GOVERNMENT’S IMPACT ON GOLD 1

GOVERNMENT IMPACTS ON INDIA'S IMPORTS AND DOMESTIC GOLD PRICE DURING THE
COVID PANDAMIC

Pham Thi Khanh Linh

GBH210790 _ GBH1109

University of Greenwich (Vietnam)

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Abstract

The covid-19 pandemic has had profound consequences for the global economy, affecting many components
of financial markets, including the gold market. Traditionally, gold is a consistent option for investing in people,
especially after pandemic occurs when the profitability of other savings instruments decreases. Besides, it is
considered a safe investment, a hedge against inflation. However, the government is taking all steps to prevent
the decline in the price of Indian currency, and the increase in import duties on gold is among them. The price
of gold has been high since the beginning of the Covid-19 pandemic but if you are planning to buy new jewelry,
it will cost people a higher price now because the government has increased import duties on yellow metals.
Since India imports most of the gold for jewelry, the increase in import duties will make people more expensive.
The study attempts to determine the impact of government on import-export and gold prices in India during the
covid pandemic and to provide a common assessment of the problem.

Keywords: COVID-19; Gold; Spillover; Indian; Indian Commodity Market.

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Table of Contents

Introduction ................................................................................................................................................... 4

Rationale of research ..................................................................................................................................... 4

Critical analysis ............................................................................................................................................. 4

Current problems ....................................................................................................................................... 4

Possible causes ........................................................................................................................................... 5

Contemporary solutions ............................................................................................................................. 5

Evaluation and reflection ........................................................................................................................... 5

Conclusion ..................................................................................................................................................... 6

References ...................................................................................................................................................... 7
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Introduction

The Covid-19 pandemic has had far-reaching consequences for all countries. The global economy has entered
a deep recession, supply chains have stalled, and the Covid-19 pandemic has affected virtually every market.
The Gold market with the government of India is no exception. India is the world's second biggest gold
consumer after China and domestic prices include 10.75% import and 3% GST. Gold dealers in India charged
a premium of up to $1 an ounce over official domestic prices, as compared to $5 discounts, according to news
agency Reuters. In this research paper I will present the problems and the impact of government on it. In
addition, I will give the necessary solutions, gold has always been an integral part of the socioeconomic profile
of Indian households so solutions are needed to improve the situation.

Rationale of research

In 2020, gold shone brighter than ever, hitting an all-time high of around Rs 58,000 per 10 grams. It gave
investors the best returns possible, thanks in large part to the global economic slowdown caused by the pandemic
and excess liquidity in the system. To recover from the crisis, the Indian government, in particular, has taken
specific steps.

Critical analysis

Current problems
India's merchandise imports, which had slowed in 2019, began to recover in January and February 2020.
According to Taila (2021), as the pandemic spreads, import growth registered the largest contraction in 30 years
in April 2020, contracting by 59.7% compared to a growth of 6.1% in April 2019. Volume was also reduced as
a result of the contraction. According to the most recent available data, imports fell 18.0 percent to US$ 389.2
billion in 2020-21 from US$ 474.7 billion in 2019-20. The price of gold will probably affect many aspects of
the domestic economy, in particular currency market, interest rates and inflation. Accoding to Vu (2021),
Imports have contracted due to price and volume effects, with import volume estimated to have decreased by
8.9%. Similar to the gold market, the UAE has been the biggest destination for gold jewelry exports, accounting
for over 50% of India's total gold jewelry exports. However, travel restrictions and the reluctance of Indian
exporters to ship by credit due to the uncertainties created by the COVID-19 have led to a serious drop in the
export of gold jewelry to the UAE (Reserve Bank of India, 2021).
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Possible causes
The COVID-19 outbreak caused severe supply and demand disruptions, gold jewelry demand is also seriously
affected. Specifically, India's demand for gold jewelry fell 74% sharply from the same period to 44 tons, the
lowest level recorded by the quarterly report of the WGC due to government blockade orders from late March
to mid-May in order to limit the spread of the disease. The drop in the second quarter also contributed to a
decline in jewelry demand in the first half of 2020, which dropped 60% over the same period to the lowest in
history of 117.8 tons. As constraints were gradually lifted, economic activities gradually resumed in June, the
demand for gold could improve (Livemint, 2022).

Contemporary solutions
According to Hecht (2015), the role of gold as a currency is common around the world. Throughout history,
gold has been money. The ancient philosopher Aristotle wrote that money is long-lasting, divisible, consistent
and convenient and that it is worth itself. However, the Indian state only started to improve the situation.
Specifically, According to Reuters (2022), India has raised its basic import duties on gold from 7.5% to 12.5%,
as the world's second largest consumer of precious metals is trying to reduce demand and reduce the trade
deficit. The increase in taxes will raise prices and reduce demand in India, which may affect global prices. But
it could promote illegal trade and increase smuggling of precious metals into the country. In addition, with
economic losses, company closures and job losses, it would be a mistake to assume economic activity will
return to normal once the embargo is lifted. India allows some bans to be lifted, supply chain disruption that
will lessen even if the supply can normalize only when there is a delay. Here, the degree of recovery from
production also depends on the extent to which the business exists and the success of the credit and liquid
pumping measures (Ramakumar and Kanitkar, 2020).

Evaluation and reflection

It is practically impossible to deny India's government efforts in the gold market during the covid pandemic.
Yet one of the leading powers in gold import and export, India can do better now. Specifically, India was first
able to make the most out of its corporate resources and credit institutions in the gold market to help stabilize
the state economy. Second, the State Bank may consider setting the price of gold pieces per day in the country,
along with a reasonable margin. That means that every day, the State Bank would announce the price of SJC
gold pieces on average. Subsequently, credit enterprises and organizations permitted to trade in gold would
apply the purchase price and sale prices based on the average gold price published by the State Bank of Vietnam
but were subject to the price margin specified by the State Bank of Vietnam. In particular, the State should
strictly punish the illegal importation of gold, violation of the exclusive rights to produce gold pieces of the
State Bank, taking advantage of the price difference to trade.
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Conclusion

This paper covers the problem and actions of the Indian government on the Gold market. In particular, when
the covid pandemic came across the Gold market, there was a downward trend, leading to the decline in gold
prices brought by India's economic consequences, as one of the world's largest imports and exports of Gold, the
government of India has come up with some specific solutions to the customer. In my view, Gold is one of the
hard assets to replace, yet the state should not abuse and need to balance other factors in order to evenly develop
the state economy. Although currently the Indian government has not had breakthrough and radical measures,
however it is likely that in the future India will find a way to overcome and develop a stronger development of
the gold market in particular and the domestic economic market in general.

Word count: 1042 words.

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References

Hecht, A. (2015) “The Relationship Between Gold and the US Dollar,” The Balance, 3 April. Available at:
https://www.thebalancemoney.com/the-relationship-between-gold-and-the-u-s-dollar-808978 (Accessed:
November 2, 2022).

Livemint (2022) “From discounts, gold prices in India swing to premium,” Mint, 8 January, p. 1. Available at:
https://www.livemint.com/market/stock-market-news/from-discounts-gold-prices-in-india-swing-to-
premium-11641624241021.html (Accessed: November 2, 2022).

Mukherjee, L. and Bardhan, R. (2022) Assessing the Impact of COVID-19 on Interactions Among Stock, Gold
and Oil Prices in India, Springer Nature Singapore. Available at:
https://link.springer.com/chapter/10.1007/978-981-16-7668-0_14 (Accessed: November 2, 2022).

Ramakumar, R. and Kanitkar, T. (2020) “IMPACT OF COVID-19 PANDEMIC ON THE INDIAN

ECONOMY: A CRITICAL ANALYSIS,” Investigación Económica, 80(315), p. 3.
doi:10.22201/fe.01851667p.2021.315.76845.

Reuters (2022) “Indian gold discounts narrow, Covid-19 curbs keep leash on China demand,” Business
Standard, 17 June. Available at: https://www.business-standard.com/article/markets/indian-discounts-
narrow-covid-19-curbs-keep-leash-on-china-demand-122061700694_1.html (Accessed: November 2,
2022).

Taila, R. (2021) Reserve Bank of India, Annual Report. Available at:

https://rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1315 (Accessed: November 2, 2022).

Tang, W. et al. (2022) “Research on the Impact of COVID-19 on Import and Export Strategies,” Frontiers in
Environmental Science, 0(28). doi:10.3389/fenvs.2022.891780.

Vu, D. (2021) Khang Kiet Vi COVID, VnEconomy. Available at: https://vneconomy.vn/khanh-kiet-vi-covid-

nguoi-an-do-o-at-ban-trang-suc-vang.htm (Accessed: November 2, 2022).
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