Benefit from lower gold imports cannot be overstated: Emkay Global

MUMBAI: Reports of a sharp 38% contraction in gold demand in Q1FY13 and projection of 25% decline in 2012 by World Gold Council (WGC) have kindled hopes of rebalancing external deficit. But WGC's data do not reflect India's non-official gold import in its entirety, says a report by Dhananjay Sinha, Co-Head Institutional Research, Economist and Strategist, Emkay Global.

"While we have factored in a 10.9% decline in gold imports in FY13E, we believe the benefit from it cannot be overstated. Positive price elasticity for Indian gold demand during FY08-12 is abnormal and reflects multiple structural factors supporting demand which are hard to suppress easily. Hence, we expect BoP vulnerability to sustain," Sinha says.

Emkay has compared WGC's data with BoP data on non-official gold imports and our estimate of non-RBI gold imports based on trade data. Gold import estimates based on both BoP and trade data are significantly higher than WGC estimates for the past four years.

Post 2007, gold imports increased along with higher gold price: Both correlation and elasticity between physical gold imports and prices turned positive during FY08-FY12, which indicates rise in demand at higher price levels. This is in contrast to the more logical inverse relationship during FY02-FY07.

Positive price elasticity reflects high inflation & public spending, cash transactions and black money: The positive elasticity highlights abnormal consumption behavior and may be attributable to several factors:

1) Gold demand acting as a hedge against high inflation,

2) the usual negative price effect may have been over powered by strong income effect factors (possibly aided by higher government consumption spending),

3) higher government spending may have stimulated higher cash transactions which spilled over to real estate & gold demand and

4) expansion in the back money.