Poor Rain May Dwindle Jewellery Demand in India

India’s gold jewellery sector is yet to recover from a series of the earlier and present government measures introduced to curb the gold demand and to control the ever swelling Current Account Deficit (CAD). Now the sector is again facing dawn fall in domestic jewellery demand on the eve of Diwali, this time because of the likely poor monsoon.

Monsoon plays a decisive role in the Indian economy. Country’s agriculture sector accounts for 20% of the economy, with two-thirds of its population reliant on farming. Mr. Haresh Soni, Chairman, All India Gems and Jewellery Trade Federation (GJF) says, “We fear that the jewellery demand would come down in the rural areas which is dependent on agricultural income. However, we are still hopeful that the monsoon may recover in the later part and remain for an extended period to make up for the deficits.”

While on one hand, the industry appears to have lost hopes of rural demand, the situation in metros and urban areas, on the other hand seems to be no different. With the India Government increasing the tax exemption limit in its recent interim budget by ₹50,000 to ₹2.5 lakh, many people are now opting to invest in productive assets than buying gold, feel analysts.

High inflation has also compelled India’s middle class consumer to opt for low cost jewellery with lower gold content. Traders here say that light-weight jewellery is becoming more popular among consumers. Though they tend to prefer conventional gold jewellery for weddings, middle and upper middle class customer are now opting for jewellery with lesser gold content.

As far as investment options are concerned, equity markets and mutual funds have turned out to be more dividend payers. Traders here say that gold investors lost heavily last year because of the volatility in prices. Moreover, the sharp fall in gold prices during recent months has made them extra vigilant.

But it would be interesting here to note growth figures of some of the listed jewellery companies during 2009-10 when India had last received deficient rainfall. Titan’s sales during 2009-10 grew by 22% and its profit rose to 53%; Tribhovandas Bhimji Zaveri (TBZ)’s sales and profit went up by 32% and 62% respectively. Other big jewelers like Gitanjali Gems, PC Jeweller, Thangamayil Jewellery and Tara Jewels also achieved robust growth.

Some of the factors which might have led to their startling growth are, in the wake of the world-wide financial crisis, gold prices had gone up sharply during that period which helped jewelers make up in terms of value what they had lost during the first half of the year. Secondly, volume growth had made a comeback in the second half of 2009-10 with stimulus measures supporting economic growth in India and customers readjusting themselves to higher gold prices and resuming purchases. Thirdly, with listed jewellery companies remaining focused on metro cities and urban markets, they might have remained unaffected from the impact of lower discretionary spending by the rural consumer, who remains the most affected by poor monsoon.

So, with the situation remaining the same for listed jewellery companies (they remain focused on the big cities and towns), this year also they are unlikely to be affected by dwindling rural India’s purchasing power, if in case the economic growth picks up with the help of non-farming sectors.

But there are still two factors which could prove be dampeners. One, unlike 2009-10, gold prices are weaker at present than the year before, with the world-wide demand for the yellow metal waning. This would keep realizations low. Moreover, India government’s decision to continue with the gold import curbs may put a spanner in the demand growth.

Posted by Suresh Chotai