Jewellery industry hit by govt efforts to cut trade deficit
The falling rupee and widening trade deficit have prompted the government to take steps to rein in gold imports.
Kolkata-based Bachhraj Bamalwa runs Nemichand Bamalwa and Sons, a Rs 400-crore jewellery company. Bamalwa's family has been retailing gold for several generations. Over the past few weeks, the kaleidoscopic scenario in the gold market has kept retailers like him on their toes.
The falling rupee and widening trade deficit have prompted the government to take steps to rein in gold imports. The trade deficit - the difference between exports and imports - increased to $20.1 billion in May, up 13 per cent from April. The ballooning of the trade deficit was partly due to a record 162 tonnes of gold imports in May - more than twice the 2012 average import of 72 tonnes a month.
In early June, the Reserve Bank of India placed curbs on all gold importers - banks and nominated agencies. Importers must now pay cash up front before buying gold from abroad. Except for Bank of Nova Scotia, which is still bringing in small quantities, most banks have stopped importing gold. "Importers operate on a thin margin. Given the volatility in gold prices - they hit a three-year low on June 26 - bankers are not ready to take the risk," says Rajesh Khosla, Managing Director of MMTC-PAMP India.
It gets worse. "Not only has the gold supply line come to a halt, but also gold retailers who have already used their lines of credit are not being issued fresh loans by banks," says Bamalwa. "Banks are not comfortable lending to the sector." He adds he expects the gold business to remain subdued until September.
The stock prices of leading gold retailers such as Titan Industries, Gitanjali Gems and PC Jeweller have fallen sharply. "The lower credit availability affects our cash flow position and increases working capital requirements in the immediate future," says Sanjeev Agarwal, CEO of Gitanjali Export, a subsidiary of the Rs 16,400-crore Gitanjali Group.
The need to curb gold imports had also led the government to increase import duty on gold from one to eight per cent (between January last year and now). Authorities are particularly concerned that a large portion of imported gold is being used for investment purposes. An estimated 35 per cent of the 864 tonnes imported last year was investment-related demand. "Investment in gold does not create value for anyone," says Gitanjali's Agarwal. "Jewellery, on the other hand, involves productivity and creates employment."
The All India Gems & Jewellery Trade Federation has directed its members to stop selling gold bars and coins, which consumers buy as investment. "The step will surely reduce jewellers' top lines, but profits are likely to stay stable," says Sribash Dasmohapatra, Executive Director of the federation.
Analysts say the government's steps to curb gold imports are indeed likely to shrink the trade deficit in the current fiscal year. "On average, India has imported 950 tonnes of gold in the past three years," says Abneesh Roy, Associate Director, Edelweiss Securities. "The comparable figure for the current year is likely to be 200 tonnes less."
The falling rupee and widening trade deficit have prompted the government to take steps to rein in gold imports. The trade deficit - the difference between exports and imports - increased to $20.1 billion in May, up 13 per cent from April. The ballooning of the trade deficit was partly due to a record 162 tonnes of gold imports in May - more than twice the 2012 average import of 72 tonnes a month.
In early June, the Reserve Bank of India placed curbs on all gold importers - banks and nominated agencies. Importers must now pay cash up front before buying gold from abroad. Except for Bank of Nova Scotia, which is still bringing in small quantities, most banks have stopped importing gold. "Importers operate on a thin margin. Given the volatility in gold prices - they hit a three-year low on June 26 - bankers are not ready to take the risk," says Rajesh Khosla, Managing Director of MMTC-PAMP India.
The stock prices of leading gold retailers such as Titan Industries, Gitanjali Gems and PC Jeweller have fallen sharply. "The lower credit availability affects our cash flow position and increases working capital requirements in the immediate future," says Sanjeev Agarwal, CEO of Gitanjali Export, a subsidiary of the Rs 16,400-crore Gitanjali Group.
The need to curb gold imports had also led the government to increase import duty on gold from one to eight per cent (between January last year and now). Authorities are particularly concerned that a large portion of imported gold is being used for investment purposes. An estimated 35 per cent of the 864 tonnes imported last year was investment-related demand. "Investment in gold does not create value for anyone," says Gitanjali's Agarwal. "Jewellery, on the other hand, involves productivity and creates employment."
The All India Gems & Jewellery Trade Federation has directed its members to stop selling gold bars and coins, which consumers buy as investment. "The step will surely reduce jewellers' top lines, but profits are likely to stay stable," says Sribash Dasmohapatra, Executive Director of the federation.
Analysts say the government's steps to curb gold imports are indeed likely to shrink the trade deficit in the current fiscal year. "On average, India has imported 950 tonnes of gold in the past three years," says Abneesh Roy, Associate Director, Edelweiss Securities. "The comparable figure for the current year is likely to be 200 tonnes less."
