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June 6, 2022updated 04 May 2022 1:44pm

India’s golden opportunity?

India is the world's second-largest consumer of gold, so why can't the country cash in on its own vast resources?

By Ruth Strachan

Foreign direct investment (FDI) in India saw a 26% drop in 2021, according to a report from the UN Conference on Trade and Development. This was largely attributed to a combination of the impact of the Covid-19 pandemic and a particularly strong 2020 with regards to large mergers and acquisitions deals that were unlikely to be matched.

However, Rumki Majumdar, associate director and chief economist at Deloitte India, is optimistic despite the drop in FDI figures. “We expect FDI investments to be the leading contributor towards India becoming a $5tn economy in the next five years,” she says. “The government of India plans to encourage greater FDI inflows by increasing limits in prospective sectors.”

Indeed, the Indian Government is putting its weight behind boosting the country’s investor friendliness. By 2022, the Indian Government had opened up the majority of sectors (excluding a handful of strategic sectors that were omitted for security reasons) to 100% foreign ownership.

Mining for investment

A key sector included in these FDI-friendly moves has been mining. The policy now allows for 100% FDI through an automatic route (as in not requiring any approval from the Reserve Bank of India or the government) for mining and exploration in metals and non-metals.

At the Global Mining Summit in December 2020, India’s Minister of Parliamentary Affairs, Coal and Mines, Pralhad Joshi, announced that there would be “structural reforms” in a bid to “increase participation of the private sector in mineral exploration… to ensure seamless transition from exploration to production”.

As a resource-rich country – particularly in valuable minerals including chromite, iron ore, coal, and bauxite – mining is one of India’s most important, and potentially lucrative, sectors. However, mining has had a patchy history in India, suffering problems with poor safety measures and insufficient infrastructure – issues that the government is keen to improve.

In March 2021, the Mines and Minerals Development and Regulation Bill was amended from its original 1957 form, with the key objective being to better utilise the potential and capacity of India’s mineral sector, create better transparency in the auctioning of mines, and boost employment and investment in the sector.

Speaking in August of 2021 to the Economic Times, Anil Agarwal, the chairman of Indian mining company Indian Vendant, cited coal and gold as key resources impacted positively by the bill. Coal has long been an important export for India – it is the second-largest coal producer in the world – but its gold resources are largely untapped.

Fool’s gold or hitting the jackpot?

In a country that has some of the highest gold stocks held by households in the world – around 25,000 tonnes (t), worth about $800bn, according to a 2018 World Gold Council (WGC) report – there is little gold being mined in India.

In fact, India was the world’s second-largest gold consumer after China between 2016 and 2020, and imports made up 86% of India’s overall gold supply, according to a 2021 WGC report. This booming domestic market and India's surfeit of gold reserves only serve to highlight the opportunities on offer should the country start to tap better into its own resources.

In 2022, the government reported that India had 501.8t of gold ore reserves. The 2022 Gold Mining in India WGC report forecasted that the country could have the potential to boost production to an average of 20t per year in the long term, a big jump from its 2020 production of 1.6t.

These are small numbers compared with the mammoth production of China – which produced 328.98t in 2021 alone, according to Statista – but the increased demand for gold (particularly around India's wedding season) could be better served by its own reserves.

Gold production in India has long been volatile, and has been in general decline since 2010. The WGC report cites the key reasons for the decline as regulatory challenges, restrictive taxation policies, and poor infrastructure.

A long road ahead for gold mining in India

India's most prohibitive regulation saw the restriction of the transfer of mining leases and prospecting licences between companies, a deterrent to investors that was simplified in 2021. Many mines in India have also suffered from poor infrastructure, with no access to water or electricity, which would often stall operations.

Furthermore, following the closure of the Kolar gold fields in Karnataka in 2001 – once the second-deepest mine in the world at approximately 3,000m – gold mining in India has suffered a public backlash. There were reports that cyanide and silica waste had been left behind when the mine closed, leaving health and welfare concerns for the residents who remained.

Despite such a negative legacy, however, Majumdar is optimistic over the future of gold mining in India. “The prospects for India’s mining sector look strong given the government's impetus with regards to infrastructure spending, the real estate sector (residential and commercial buildings), automotive production, electricity production, etc,” she says.

Majumdar adds that she expects India to capitalise on its strategic position by improving its export opportunities to cater to fast-growing Asian markets in particular. However, for this to happen further regulatory reforms will be required and infrastructure improvements will be urgently needed. Majumdar is also keen to stress that demand for gold in India is currently very high – and that may not always be the case.

“Demand for gold increases during uncertain times," she says. "The uncertainties caused by the Covid-19 pandemic and the consequent instability in financial markets have increased investors’ appetite for gold as a safe-haven investment.”

It seems that the Indian Government is taking steps to improve its mining sector and its reputation regarding FDI more generally. A future in which India can decrease its gold imports and serve its own domestic demand looks a long way down the road, however, due to safety concerns and infrastructure limitations.

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