MUMBAI Laxmibai Karanure sifts through the heavy bangles and necklaces that make up her life savings, working out which pieces to sell from the 100 grams of gold she holds to tide her family over during the drought at their farm.
The 55-year-old Karanure's heirlooms will add to a booming recycling trade, which could account for up to half of India's consumption this year and boost a fledgling refining industry.
The surge in recycling also comes as India looks set to be overtaken by China as the world's biggest consumer of gold, after a hike in import duties in March and a rapidly weakening rupee pushed local gold prices to record highs.
The potential for recycling is huge with India's 1.2 billion people estimated to have stored up about 20,000 tonnes of gold in the form of jewellery, coins and bars, according to an estimate from industry body the World Gold Council -- about three times the holdings of the U.S. Federal Reserve.
"We have no other option but to sell our gold in these tough times," said Karanure, speaking from her village in Chikkodi in Karnataka.
She could get nearly 150,000 rupees from the sale of her bangles and necklaces, a vital source of income after drought this year has slashed rural incomes.
The Bombay Bullion Association (BBA) estimates the supply of recycled gold in India will hit 300 tonnes in 2012, up about five-fold from 2011 and the highest in more than a decade.
Graphic: Indian gold imports and scrap link.reuters.com/vet42t
"There won't be new demand from farmers and scrap will flow in the market," said Prithviraj Kothari, president of the BBA, made up of 400 bullion dealers and traders. "In coming years, 50 percent of the requirements will be met through scrap."
Other traders and analysts agreed. Harshad Ajmera of Kolkata-based JJ Gold House estimates scrap supply at 200 tonnes this year.
India's scrap market in 2011 was only 58.5 tonnes, or 6 percent of total gold demand of 969 tonnes, but it is being boosted as consumers baulk against paying a 4 percent import tax and with the local price of gold near a record high of 32,421 rupees per 10 grams.
Farmers in India are the biggest buyers of gold which they use as savings in the absence of a functional bank network.
This year, because of a drought in parts of the country, they are having to cash in gold to pay off loans taken out to purchase fertiliser and seeds, which have in many areas failed to produce a crop.
The hoarded bangles and rings are melted down to rejoin the bullion market in new designs of jewellery or bars and coins -- and that is bringing extra work to refiners.
The BBA estimates refining capacity is currently at about 100 tonnes a year in India, which for decades has relied on imports from South Africa, Australia, and Switzerland for most of its requirements.
Much is done with simple machines in the back of family-owned shops in gold markets such as Zaveri Bazaar in Mumbai.
But bigger refiners plan to expand.
Harmesh Arora, director at the National Indian Bullion Refinery in Mumbai, said the firm is planning to expand capacity from the current 30 tonnes per year without elaborating.
Further expansion of the refining industry in India will emerge only after there is more readily available supply of dores, a crude form of gold recovered from mines which is often used by foreign refineries, he said.
Industry officials are also calling on the government to provide incentives to local refiners through special loans for expansion and to restrict coin imports by banks.
(Additional reporting by Rujun Shen in SINGAPORE; Editing by Ed Davies)