India’s organised jewellery retailers to benefit from regulatory changes; exporters continue to face headwinds

India’s gold jewellery demand is likely to increase 17 per cent in 2017 on a bounce-back after demonetisation, India Ratings and Research (Ind-Ra) said in a report.

It forecast India’s gold jewellery demand at 600 tonnes in 2017, which is equivalent to the last five years’ average. The World Gold Council (WGC) estimated India’s gold jewellery demand at 514 tonnes in 2016.

“Jewellery demand remains robust, given India’s demographics and wedding-related purchases. Demand is likely to rebound to above a five-year average of 600 tonnes in 2017,” said Harsha Sodhani, an analyst with India Ratings.

Ind-Ra maintained a stable outlook on organised jewellery retailers and a negative outlook on cut and polished diamond (CPD) exporters for FY18.

As per WGC, India’s gold jewellery demand fell sharply 22% year-on-year to a seven-year low in 522 tonnes in 2016. The demand was impacted severely on account of various one-off events such as nationwide jewellers’ strikes in the forst quarter of the current financial year and severe liquidity crunch on account of the government’s demonetisation drive.

“Given the backdrop of four months of complete disruption on either the supply or demand side, Ind-Ra believes the fall in consumer demand was caused by idiosyncratic factors. However, the underlying jewellery demand still remains robust, given India’s strong macro-demographics and the consumer’s affinity towards gold. Hence, demand is likely to bounce back to above a five-year average of 600MT in 2017,” the report said.

The government has been introducing regulatory changes over the last two years to control illicit trade practices prevalent in the jewellery industry, which is likely to benefit organised jewellers at the cost of unorganised retailers. Retailers face an overhang of the impending Goods and Services Tax Bill and a higher slab rate may turn out to be demand dampener particularly for the non-wedding segment.

Conversely, the report said, CPD exports increased 13% year on year to $16.8 billion during the first nine months of the fiscal year, after declining for two consecutive years as per the Gems and Jewellery Export Promotion Council.

This was because players across the value chain restocked following stock unloading and cautious inventory management in 2015 in response to a slowdown in the consumer demand for diamond jewellery in China and Hong Kong beginning in the second half of 2014.

Although CPD exports have rebounded, the agency believes that midstream players continue to face headwinds for diamond jewellery demand owing to political and economic environment in key export markets. Additionally, the players continue to operate on thin margins and carry the inventory/price risk.

Outlook Sensitivities

Regulatory actions by government: 

Reintroduction of any measures to curb gold imports or reduce its physical consumption or higher-than-anticipated Goods and Services Tax rates is likely to have a negative impact on the organised retailers.

Recovery in demand and reduction in divergence of prices:

Recovery in Chinese demand and buoyant US demand for diamond jewellery, and the relative improvement in CPD prices than rough prices are likely to positively impact the exporters.

Supply shocks in the short-term: 

Any severe fall in supply of mined gold globally can lead to higher gold prices and may dampen the gold consumption, leading Ind-Ra to change its outlook to negative for the organised retailers.


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