Higher gold prices and lesser availability of finance for jewellers will see jewellery demand growth weakening in 2018. Regulatory risks too will continue to dampen the demand.
In calendar year (CY) 2017, gold jewellery demand grew by 12 per cent in volume terms and 9 per cent in value. According to rating agency Icra, jewellery demand is expected to grow slower by 2-4 per cent this year. However, it has estimated growth in value terms during the year will be around at 5-7 per cent due to higher gold prices.
Several factors, including the pent-up demand on the back of favourable gold prices, pre-buying ahead of GST (goods and services tax) rollout, extended wedding season and strong rural demand with good crop output had supported growth in demand in 2017.
In 2018, higher prices will dampen sales. This was quite evident in the way customers came out to buy gold during Akshaya Tritiya. Higher prices had hit gold sales during the festival.
Buying gold on Akshaya Tritiya is widely considered to be auspicious. Many view the event as a good opportunity to invest their money. However, in terms of buying gold as an investment, the scenario has undergone quite a change with the annual returns going down by more than half in the past 20 years. Over the last three years, gold has fetched a lower return of 4.68 per cent from 10.05 per cent earlier.
On the other hand, jewellers might not be in a position to market and lure customers to stores as earlier. The Punjab National Bank (PNB) loan fraud has hit the industry making it difficult to access bank finance as easy as earlier.
Gold imports in the past quarter were 50 per cent lesser, which showed the slackness in sales as well as that among jewellers in replenishing the inventory.
Regulatory risks are not yet down as far as the industry is concerned. Last year, higher tax rates after GST rollout and inclusion of the jewellery sector under the ambit of Prevention of Money Laundering Act had affected gold sales.
Once current account deficit (CAD) becomes an area of concern for the country, gold import will once again come under the scanner and the government may resort to measures to curtail demand.
“Gold prices have increased steadily in the last three months, which coupled with lesser number of auspicious days, impacted jewellery demand. Also, financing to the gems and jewellery sector has been under increased scrutiny in the recent months following reporting of fraud by few lenders on their exposures to the sector.
“With enhanced due diligence and checks on credit quality and inventory quality, lenders are more cautious on the sector. We expect the tightened credit availability to affect the working capital position of jewellery retailers, especially the unorganised ones,” said K Srikumar, vice-president of Icra.
Meanwhile, Icra also expects that over the medium to long term the gold jewellery retail industry will record a 6-7 per cent volume growth supported by stable rural and wedding demand, cultural affinity for gold, rising disposable income, and favourable demographic profile.
Icra also finds that post-demonetisation and after GST rollout, there has been a marked shift from unorganised to organised trade.
Revenue of the domestic gold jewellery industry represented by Icra’s sample of nine major organised retailers is estimated to have grown by 12 per cent during FY18 following a 9.6 per cent growth in FY17.