Of all the glitter around Diwali, gold seems to be shining the brightest. A mere fortnight of festivities accounts for approximately 13-14 per cent of the yellow metal sold through the year. But demand has been particularly low in recent times. In the first half of calendar year 2014, gold in India for both jewellery and investments was down by 34 per cent in volumes at 394.3 tonnes compared to 594.5 tonnes recorded last year. In terms of value (Rs ), it was down by 37 per cent at Rs 99,417.3 crore compared to Rs 15,8717.4 crore recorded last year.
In the first half of 2014, jewellery demand was down by 14 per cent in volumes at 300.1 tonnes compared to 347.5 tonnes recorded in the same period last year. In terms of value, it was down by 19 per cent at Rs 75,647.3 crore compared to Rs 93,047.4 crore in jewellery in the first half. But India’s gold imports went up five fold to $3.75 billion at the start of the festive season in September 2014 compared to $682.5 million recorded in the same period last year. After nearly two years of unstable prices, gold gained Rs 70 to hit the Rs 27,650 (per 10 grams) mark in New Delhi on October 15, 2014.
“Demand is good this Diwali as prices are lower than last year. There is a 30 per cent jump in demand during this period compared to last year,” Balram Garg, managing director of designer gold retailer, PC Jewellers said. The drop in prices in the last two years had seen demand during Diwali drop down by 10-15 per cent in 2013. But the drop in prices can swing demand both ways, according to leading gold retailers. The UPA government had increased taxes on gold imports to 10 per cent to contain its impact on the Current Account Deficit (CAD) situation of the country. “Internationally, gold prices are going down. This year prices are lower so it’s good. If government removes more restrictions, then demand will be higher,” Garg added.
The increased restrictions were bringing down the growth rate of the Rs 2.5 lakh crore industry. Rajesh Mehta, chairman of Rajesh Exports Limited, a Bangalore-based jewellery export company that growth was muted due to greater restrictions last year. “There were too many restrictions, but this year there is some rationalisation which has made channels smoother for us to operate,” he said.
The Ministry of Commerce and Industry is initiating measures to ease restrictions to boost gems and jewellery exports from India. But former Union Finance Minister P Chidambaram has advised against any lifting of restrictions. He said that benefits from restrictions would outweigh problems like a spike in smuggling activities. “I agree that CAD should be reduced by exports, but it won’t happen overnight. Can we afford to spend $50 billion on gold imports? We can’t afford it,” Chidambaram was quoted by news agencies as saying.
But macro-economic arguments have seldom deterred the Indian consumer. “Irrespective of the international markets, gold remains the first choice. Even though prices are not going up, demand is coming back slowly,” DV Ravindranath, director of Bangalore based Davanam Jewellers said.
And, even though there could be low footfalls, the wedding season normally makes up for sluggish demand. “Gold and jewellery accounts for almost 40-50 per cent of the cost of a wedding. And 70-80 per cent of our sale is in wedding jewellery,” Garg said.
Jewellery-making is where retailers make their margins as well as offer discounts. “For jewellery, margins are around 14-15 per cent but in coins and bars, the margin is around 1-2 per cent,” said Garg . He also expressed that traditional jewellery-making charges have a margin of 6-12 per cent while designer jewellery margins are as high as 8-25 per cent. A point which has pushed most retailers to focus on jewellery sales over coins. PC Jewellers’ coins sale account only for two per cent of the total sales. A trend not so different for other retailers.
Even though weddings have kept demand for jewellery intact, gold as an investment has come down in recent times. In the first half of 2014 (Jan-June), investments into gold was down by 62 per cent in volumes and by 64 per cent in value (INR) at 94.3 tonnes compared to 247 tonnes recorded in the same period last year. Gold value in rupee terms was down to Rs 23,770 crore in the first half of 2014 as compared to Rs 65,670 crore recorded last year, according to a recent World Gold Council (WGC) report.
Garg also noted that gold as an investment has taken a hit because, because the rise in prices in the last decade was slowing down in the last two years. “People are not expecting it to go up and this is forcing some of them to shift to the equity markets,” he said. Globally, only 35 per cent of gold demand is for investments in bars and coins and Gold backed ETF’s while Jewellery and technology account for 58 per cent, the WGC report added. WGC also expects gold demand to be in the region of 850-950 tonnes, which has been revised downwards from their previous estimate of 900-1000 tonnes and 200 tonnes flowing through the grey market.
“In India, the Q2 2014 gold demand tracks the long-term average of the last five years, and remains robust, particularly considering the impact of a policy squeeze and other economic factors that have affected savings in general. With the impending wedding season and favourable monsoons, it is likely that the demand in the second half of the year will be near normal,” Somasundaram PR, managing director (India) at WGC said. India accounts for 25-30 per cent of the global supply of gold, including recycled gold. “In India, people don’t buy gold with an eye on short-term price movement. It has become part of savings,” Som added. “Short-term is driven by sentiment but long-term is driven by fundamentals”; something that Indian consumers have strongly in place.
India has increasingly promoting gold jewellery with exports that account for $8 billion annually. This number is expected to rise within the next five years to $40bn, according to WGC estimates. Interestingly, WGC charts out ‘Gold tourism’ as one of India’s gold industry’s ambitions, which involves showcasing handcrafted Indian jewellery and sharing the tradition and the country’s values associated with the metal.