Investing In Gold Digitally And Its Contribution To The Indian Economy
The Indian Government’s efforts towards a digital economy have reshaped the country’s $34 billion gold market. As smartphones, e-wallets, and several flexible investment schemes emerge as viable investment platforms, India’s gold investors have shifted their preference. Consequently, digital gold investments have gained popularity in recent times.
Demand and supply share an important relationship with investment. Currently, India stands at the forefront of importing gold. The massive import of gold significantly affects the current account deficit (CAD) as well as the Government’s policy.
Nonetheless, before investing in digital gold, investors must know certain aspects of this investment instrument and its impact on the Indian economy. Let’s discuss this briefly.
Gold Acts As Hedge Against Inflation
The basics of hedge assets are to protect one’s finances from an adverse financial environment. Gold is considered an important hedging instrument owing to several reasons. Hard assets, including natural resources such as gold, silver, real estate, have limited supply hence hold intrinsic value.
Here, the interest rate is an essential factor in the supply and demand of credit. Gold prices rise when the interest rate declines which is directly related to the health of the economy.
Inflation plays a crucial role in determining interest rate levels. This is because lenders demand higher interest rate charges to compensate for the decrease in the purchasing power of money. Therefore, inflation can decrease the value of rupees and dollars and minimise the purchasing power.
Therefore, investing in gold, even in digital form, offers protection against inflation in the future. Furthermore, due to the intrinsic value of gold, it can perform well during inflation. Hence, it is clear that digital gold investment can prove to be an excellent way to protect one’s hard-earn money against inflation.
Gold Is A Safe Portfolio Diversifier
Digital gold investment adds diversity to investors’ portfolios and helps them safeguard their money against market uncertainties.
While investing, investors should not only focus on increasing wealth but also protecting it. Allocating some percentages to digital gold can provide a cushion against volatilities and heightened market risks.
Gold Has Negative Correlation With Stocks, Currencies
Gold has a negative relation with the stock market, the dollar. Therefore, gold prices move in the opposite direction of the stock market and dollar prices. It means gold prices go up when stock prices go down.
Therefore, when inflation strikes the Indian economy, the yellow metal, even in digital form, can retain its value over other currency-backed assets. As a result, investing in digital gold can help one to hedge one’s investment risk.
With such important aspects of digital gold investment into consideration, take a look at how it impacts the Indian economy.
Digital Gold Investment And Its Contribution To The Indian Economy
- As per January 2021 data, India’s gold and diamond trade contributed to around 7.5% of India’s GDP (Gross Domestic Production).
- According to the World Gold Council, the demand for gold investment has increased (in terms of volume) by 37% YoY to 140 tonnes in Q1 2021.
- Another report shows gold investment demand has increased by 8% YoY to 48.9 tonnes in the Q4 in FY2020.
- As of April 2021, India exported gems and jewellery of USD3.37 billion and imported the same worth USD2.19 billion.
The facts and figures mentioned above point to increased gold demand. This demand leads to a boost in imports which makes this yellow metal the second-highest purchased overseas commodity after oil.
The high gold price (which has doubled in the last 5 years) attracts investors, thus making the gold investment arena stronger. However, this increased gold demand and its import have resulted in a current account deficit (CAD).
When buyers purchase gold from foreign dealers in exchange for Indian Rupee, a disruption occurs in the balance of cash inflow and outflow, which further lowers the rupee’s value. CAD is related to GDP, which can impact the overall economy when it rises.
However, the Indian Government has brought about some changes in the import duty and introduced some new schemes and policies to salvage this situation and encourage more gold investment.
Investors willing to reap the benefits of gold investment know that the investment can be made in either physical or digital form. However, one can gain numerous benefits by investing in the latter.
Contrary to physical gold, digital gold investment offers benefits like quality assurance, convenience, and many more. Also, one can maximise the benefits by investing in digital gold through online platform.
A comparative analysis of these two investment mediums will aid investors to gain perspective into the matter:
|Parameter||Physical Gold||Digital Gold|
|Investment size||Gold coins and bars are available in the denominations of 10 gm.||Digital gold can be bought and sold by weight or fixed worth.|
|Price||Physical gold prices are not uniform.||Digital gold prices are uniform throughout the country.|
|Storage||Physical gold is stored either at home or locker and hence are exposed to risks of theft.||Digital gold exists only in paper form.|
|Cost||Making charges of 20%-30% are levied on physical gold.||3% GST is levied on digital gold.|
|Liquidity||Physical gold can be exchanged through a jeweller.||Digital gold is redeemed through bullion, cash, and coins easily.|
|Taxation||Gains from less than 3 years of investment are taxed as per one’s income tax slabs. On the other hand, profits from the investment that are held for more than 3 years are taxed at 20% with indexation benefit.||Taxation of digital gold is similar to that of physical gold.|
Digital gold, a new-age investment instrument, allows you to invest safely without risking the security of the asset. Not only does it guarantee a seamless investing experience, but it also offers greater investment convenience. Further, its ever-increasing popularity is attracting more investors, thereby contributing more to the Indian economy.