(Refiles to fix spelling of India in first bullet point)
* India gold recycling trade booming as drought hits farmers
* Scrap supply expected to hit up to 300 tonnes in 2012
* Fledgling refining sector getting a lift
By Siddesh Mayenkar
MUMBAI, Oct 1 (Reuters) - 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
the southwest Indian state of Karnataka.
She could get nearly 150,000 Indian rupees ($2,800) 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.
"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.
CROPS FAIL
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.
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.
($1=53.23 Indian rupees)
(Additional reporting by Rujun Shen in SINGAPORE; Editing by Ed
Davies)
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