Jewellers across India are in a quandary. Even as gold prices jumped by $3.52 (Rs 220) to $509 (Rs 31,720) per ten grams in Mumbai on November 27, given the ongoing marriage season demand and amidst a firm global trend, large jewellers across the nation are struggling given their severe inventory crunch.
“We have stocks that would last only ‘til the year end. A major worry has been that debt has been rising because we now have to pay the cost of gold upfront, whereas earlier, gold was available on lease,” said Suman Mehta, bullion retailer at Mumbai’s Zaveri Bazaar.
“There is a severe inventory crunch. While big jewellery houses have a large inventory bank and would not have been impacted with the government’s norms, smaller jewellers have been caught off guard by RBI’s strictures,” said Manoj Kedia, another jeweller.
Retailers said the high cost of importing the precious metal has also resulted in a rise in illicit gold entering the country. “Smaller, local jewellers procure the illicit material at 7% to 8% lower rates and pass on the discount to their consumers. Bigger jewellers, who buy some of their jewellery from third party manufacturers, may be actually selling some of this gold at their stores, as they have no control over the gold procured by these third parties,” said Mehta.
In September this year, the Indian government increased import duty on gold and silver jewellery to 15% from 10%, in a bid to protect the domestic industry. The government has hiked the import duty on gold thrice in 2013, as part of its measures to contain the widening current account deficit.
The All India Gems and Jewellery Trade Federation has decided to take up the cause and has appealed to the government to roll back the import duty to 5%.
“The industry is facing several issues and the domestic market is all but paralysed with the government’s 80:20 norm. This has made it very difficult for domestic players to correlate with the international market, in addition to satisfying Indian demand, which is still very high,” said Haresh Soni, chairman of the All India Gems and Jewellery Trade Federation.
According to RBI’s norms, 80% of gold import has to be for domestic use, while 20% is to be used for exports.
“Imports have come down drastically across the country. We have appealed to the Finance Minister to reduce import duty and to bring it down to 5%,” Soni added.
Bacchraj Bamalwa, proprietor of Nemichand Bamalwa and Sons, a bullion retailer in Kolkata in Eastern India said, “International prices have been hovering in the range of $1,900 to $1,300 and correction of 35% is expected. This is not reflected in domestic prices. There is a supply crunch and the premium has zoomed to $100 to $120 from $2, since there is less gold imported.”
He added that the 15% import duties and 10% premium resulted in 25% price differential which could not be borne by the trade.
Speaking about Diwali, the festival of lights in India where traditionally gold buying gets a boost, Bamalwa said, “Dhanteras 2013 (the first day of Diwali) was very bad. Sales were reportedly down 20% in most areas and even 50% down in other areas. There was wild fluctuation. Gold prices came down very sharply from $514 (Rs 32,000) per 10g to $433 (Rs 27,000) and then went up again to $530 (Rs 33,000),” he said.
Bamalwa said people had also brought forward their wedding purchases for April and May of next year, during Akshaya Trithiya, the most auspicious time to buy gold.
“During Diwali and other festivals this year, consumers restricted their purchases to pure symbolic ones. They preferred lightweight gold jewellery this festive season. Though jewellers had sold more gold coins last year, this year no investment buys took place at all,” he added.
Zaverilal Mandalia, proprietor of Zaveri and Company in Gujarat added, “In Gujarat, we witnessed very few customers during the festive season. The only time we have doubled sales in 2013 was on Akshaya Trithiya in April, when gold prices were $417 (Rs 26,000) as against $530 (Rs 33,000) during Diwali.”
He added that during Diwali, consumers preferred to purchase mix-and-match jewellery with a lot of plain and light weight gold jewellery, given the high price.
Added Anantha Padmanabhan, proprietor of NAC Jewellers in Chennai, in South India, “There were several reasons for people not indulging in gold buying during the festive season. It was not related to just high gold prices. People also refrained from buying given the bad state of the economy and inflation. The premium on gold is killing indigenous trade.”
“The global trend has reversed and the US economy has improved. We have seen one of the longest bull runs over last 10-12 years, and correction is bound to happen, but in India the situation is very serious,” added Bamalwa.
High debt has also undone many of the plans of local jewellers. Ever since the RBI asked importers to make upfront payment in cash for their gold imports, the situation has become dire for some jewellers and retailers.
For instance, Titan, which started the year with zero debt, has $152 million (Rs 9.5 billion) debt as of end October. The company uses over 20 tonnes of gold in a year.
Another retailer PC Jewellers has recorded a 100% increase in short term borrowings to $70 million (Rs 4.3 billion) in September, from $36 million (Rs 2.3 billion) in March.
Muthoot Finance, provider of gold backed loans, has also seen rising bad debt. The company has more than $4 billion (Rs 254 billion) of loans backed by 137 tonnes of gold, which rose to $86 million (Rs 5.38 billion) as of June 30, from $48 million (Rs 2.99 billion) a year ago.