Income and price elasticity of gold import demand in India: Empirical evidence from threshold and ARDL bounds test cointegration

This study investigates cointegrating relationship between gold import demand, gold price and GDP for Indian economy during the period Q1' 1998-1999 to Q3' 2012-2013. It also estimates short-run and long-run elasticities of gold import demand with respect to gold price and GDP. Johansen-Juselius, ARDL bounds test and threshold cointegration tests suggest cointegrating relationship among the variables. Gold import demand is found to be moderately inelastic to unitary elastic with respect to gold price in the long-run with income elasticity being highly elastic suggesting that gold is a luxury commodity. In the short-run, however, gold demand demonstrates high elasticity with respect to its price. Granger causality shows that gold import demand causes an impact on the price of gold in the short-run, though in the long-run income and price have impacts on the demand for gold import. The result of the study is highly insightful and has many vital implications for the Indian economy and its economic policies. The findings suggest that regular hikes in custom duties on gold import may bring temporary relief to control gold import demand and the stress on current account deficit. Hence, financial inclusion along with the creation of simple but lucrative financial products and educating people about those products may lead to a long-term respite from the depletion of foreign exchange reserves significantly by creating an investment substitute of gold.