ICRA has stable outlook on India’s gold jewellery industry despite subdued demand

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A gold jewellery shop in Mumbai's Jhaveri Bazaar. Photo/IAC

Ratings agency ICRA has a stable outlook on gold jewellery retail industry.

Following a strong 9% volume growth in FY2018, gold jewellery demand has been subdued in the current year. Jewellery sales during the critical festive period, August to November 2018, was relatively sluggish due to various factors like elevated gold prices, and floods in Kerala.

Other factors impacting demand in the current year include lesser number of auspicious days, cautious lending by banks to the gems and jewellery sector thus curtailing the store expansion plans of the players.

Gold jewellery demand in India varies across rural and urban markets, right from the type of jewellery bought, timing of purchases etc. With 65% of population in India living in rural areas, favourable farm output in the last two years on the back of good monsoons has been a positive trigger for rural demand, where jewellery is a traditional store of wealth. On the other hand, urban demand has gained traction from rising per capita income and demographic dividend.

Being a price-sensitive market, higher gold prices results in deferment of purchases by consumers. Gold prices increased by over 6% in the last one year with consequent impact on consumption demand.

This apart, financing to the gems and jewellery sector has been under increased scrutiny in the last one year following reporting of fraud by few lenders on exposures to leading diamond jewellers, and on exposures to a couple of gold jewellery retailers in South India.

Lending to the sector remains cautious with enhanced due diligence and checks on credit quality and inventory quality. Tightened credit has affected the store expansion plans and working capital position of industry players, especially the unorganized ones.

While the overall demand has been largely subdued in the current year, performance of organised players (ICRA’s sample set) has been relatively better. Post currency demonetisation and implementation of Goods and Service tax (GST), a marked shift is visible from unorganised to organised trade. This apart, assurances on quality, purity, and availability of wider design range and rising preference for fashion jewellery further supported organised trade. Going forward, ICRA expects these regulatory measures to continue to accelerate the formalization of sector and the market shares of organised players are accordingly expected to increase.

Over the medium to long term, the gold jewellery demand growth is projected at 6-7% supported by the cultural underpinnings, evolving lifestyle, growing disposable income, favourable demographic dividend and the growing penetration of organised sector.

Shekhar Ghosh is consulting editor, Indoasiancommodities.com. He has edited and written for publications like Business India, Business Standard, Business Today, Outlook and many other international publications. He can be reached at shekhar.ghosh@indoasiancommodities.in.

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