Two-thirds of India’s gold demand comes from rural areas, where jewellery is a traditional store of wealth – a fact that is largely a reflection of India’s demographics. According to the World Bank, in 2019, 66% of India’s population lived in rural areas, down from 72% in 2010 and 74% in 1990. Although agriculture only contributes 17% to India’s economy, it is highly significant for the rural economy, which accounts for over two thirds of the population. Once rural Indian communities have harvested and sold their crops, a portion of the proceeds are invested to buy gold, typically jewellery. Demand usually rises in the October-December quarter due to the wedding season and festivals such as Diwali, when buying bullion is considered auspicious.
Rural and urban India can be thought of as two distinct markets. Rural India prefers to buy gold in the form of jewellery, while urban India has a greater preference for bars and coins. As per study conducted by WGC in 2016, it suggests, 46% rural consumers mainly invest in Gold Jewellery and 11% in Gold bars/ coins whereas only 29% urban consumers invest in Gold Jewellery and 36% in Gold bars/coins. So buying pattern is very different among Urban and Rural consumers.
Rural Indians have a strong preference for plain gold jewellery, while gold set with precious/semi-precious stones is more popular in urban areas. In 2015, plain gold jewellery accounted for 88% of purchases in rural India. In urban India the figure was 57%, with gem-set pieces accounting for 35% of gold jewellery bought.
India’s low penetration of traditional financial products, especially in rural communities, is an soft-cited threat to gold consumption. Households tend to buy gold because they do not have access to other banking and savings products, or so the argument goes. Some suggest this affects not just bars and coins, but also the element of jewellery purchases which double up as investment.
In 2020, according to the WGC, India’s gold consumption fell by a staggering 56% during the first half of 2020 compared with the same period last year. The twin blows of the lockdown and high prices meant customers did not empty their pockets. As Gold prices shot up by 30%, demand was dented as for a 1% increase in the gold price, demand decrease by 0.9%. Due to social distancing rules, weddings and other celebrations have been limited, postponed or cancelled, which in turn affected jewelry demand.
COVID-19 has massively impacted rural workers. The market was hit hard by the countrywide lockdown, which saw millions of migrant workers flee India’s cities as their income dried up. 70% of migrant workers left for their villages and manufacturing units are all closed. Stranded Workers Action Network found that 50% of workers had rations left for less than one day; 74% had less than half their daily wages remaining to survive for the rest of the lockdown period; and 89% had not been paid by their employers at all during the lockdown. Millions of Indians have lost their jobs or seen their salaries cut as part of the economic fallout from Covid-19 and the nationwide lockdown. Job losses and home and food insecurity have left this group highly vulnerable.
But in second half of 2020, though lockdown continues in few cities, a good monsoon season could help spur gold demand in rural India, while people may steer their savings and other spending into the precious metal. As per IMD, India has received 10% excess rainfall from June to August 2020. More and better-distributed rainfall this year is likely to result in higher sowing, higher production, productivity and profitability for the agriculture sector in rural India. And as per WGC, 1% increase in monsoon rainfall above the long run average boosts gold demand by 0.5%. As a good monsoon can increase crop yields, sweep money in rural economy and boost Gold demand.