High Optimism in Indian Jewellery Industry

Suresh_20140603_Gold-import-curbsWith Mr. Narendra Modi taking oath as India’s new (15th) Prime Minister on 26th May 2014, the entire gem & jewellery industry of the country has become ecstatic. Optimism is also soaring high with the hope that the new government’s prime agenda along with the Reserve Bank of India (RBI) would be an interim budget and relaxing the curbs on gold imports which the out-going government had introduced.

Taking a further step into this direction, the RBI has permitted a larger number of players to import gold last week under the 80:20 rule — wherein 20% of imports must be exported. The move has already had a constructive effect. As soon as the announcement was made, gold prices dropped immediately to INR 27,900 per 10 grams from INR 29,500 and the premium also came down to INR 85,000 per kg. If the Modi government further relaxes the curbs on gold imports and cuts the 10% import-duty to less than 5%, the premium may drop to INR 20,000 per kg and the price of gold would go southwards.

Various trade associations of India’s gem and jewellery industry had given several suggestions to the previous government to fish out thousands of the tonnes of gold lying idle with the people. But instead of entertaining their recommendations, the government went in for the easy option of imposing curbs on gold imports along with a hefty import duty. This resulted in acute shortage of the raw material (gold) and sudden activation of ‘illegal channels’ like smuggling.

India imported around 825 tonnes of gold during 2013 down from 860 tonnes in 2012. This was partly due to the increase in duties and restrictions. At the same time, about 200 tonnes of gold came to the country via illegal channels. However, one cannot deny that the import curbs have helped in bring down gold imports from 860 tonnes to 190 tonnes in the first three months of 2014 and thereby arrested the gap of the growing the Current Account Deficit (CAD) which had led to the weakening of the Indian currency.

Before the curbs, gold imports were the second-largest, after crude oil. Analysts here feel that it would be easier for Modi government to lift curbs on gold but it would still have to deal with the insatiable demand of the gold-consuming people. One of the many reasons for people hoarding gold was to use it as hedge against economic uncertainty and inflation. But if the country’s economy improves, perhaps the Indian people’s hunger for gold could be satiated to a certain extent. Indian people are traditionally the largest consumers of the yellow metal where people is said to have the largest privately-held hoard. Mention is need here that this does not include the thousands of tonnes of gold worth crores and crores of rupees piled in huge safes of temples.

Meanwhile, the India Ratings and Research (Ind-Ra) Company has forecast a stable outlook for India’s gems and jewellery exporters for FY 2015, while revising it on domestic retailers to stable from negative.

“The stable outlook for Indian exporters is based on expectation of modest demand growth in key export markets during 2015. Positive signs available from export destinations along with higher disposable income and consumer spending as well as improvements in consumer confidence would support export volumes of India’s gems and jewellery,” Ind-Ra said in a report

The Prime Minister Mr. Narendra Modi had tweeted after his party’s landslide victory in the recent elections on the 16th May, 2014 that good times are ahead. Rightly so, because his is the only party which has secured a clear majority after a span of almost three decades and this would also enhance the foreign investors’ confidence.

Posted by Suresh Chotai