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Introduction

The Gems and Jewellery sector, being highly export oriented, is a significant contributor to India’s foreign exchange earnings. Exports from this sector constituted around 17% of the total exports from India during FY00 to FY09. The sector is heavily dependent on imported raw materials as availability and production of raw materials is very low in India. In fact, India has been one of the largest importers of gemstones, rough diamonds and precious metals over the years and most of these imports were used for value addition and exports. India is also one of the largest consumers of gold in the world, as it accounts for more than 20% of the world gold consumption.

Given the export and import dependence of the industry, it remains very susceptible to external developments such as fluctuations in international commodity prices, exchange rate or external demand. Evidently, therefore, with the onset of global economic recession, and the consequent slowdown in the global as well as the domestic economy, the sector had been severely affected. The sector has not only witnessed deterioration in its export growth rate but also in its share in India’s total exports; the share of the sector in India’s total exports fell to an average 12.65% over FY08 and FY09. The slowdown in the Indian economy coupled with the steep rise in gold prices has also affected the domestic demand for gold jewellery. Moreover, the global credit crunch has affected the exporters, especially the smaller players, as they have to depend heavily on export credit.

However, with the recovery in the domestic economy since the second quarter of FY10 and gradual uptake in the external demand conditions, the sector has witnessed some positive developments. Both exports (since September 09) and imports (since October 09), in fact, have experienced an upturn in growth. The stimulus package provided by the government to combat the slowdown that included interest rebates, extension of credit periods and export duty benefits have also aided the sector to weather the effects of slowdown. The government had also increased the pre-shipment export credit period (from 90 to 180 days) and post-shipment export credit period (from 180 to 270 days) to ease the longer inventory cycles faced by the sector.

Exports of the Gems and Jewellery sector

The Gems & Jewellery sector has experienced high growth over the years on the back of a buoyant performance in its exports. Total exports of Gems and Jewellery has registered an impressive growth from US$ 2.99 bn in FY91 to 21.12 bn in FY09 which translates into a CAGR of around 11.47%. However, during FY01-FY02, the slowdown in the US, which is the largest importer of India's gems and jewellery, and some other importer countries, led to a demand contraction and a subsequent decline in the export growth rate for the sector; while the decline was mainly in exports of cut and polished diamonds (CPD), gold jewellery exports had remained resilient as it registered a positive growth. Net exports during FY01 and FY02 fell to US$ 7.8 bn and US$ 7.6 bn, respectively, as compared with US$ 8.1 bn during FY00. The government took important policy initiatives, including de-licensing of the import of rough diamonds (with effect from April 1, 2002), which was a long standing need, to give a boost to this sector. This was reflected in the growth in the exports during FY03. Exports during FY03 grew by 21.36% as compared to a decline of around 3% during the previous financial year.

The growth momentum in exports continued during the following two successive financial years; however, during FY06 and FY07 the sector witnessed a deceleration in the rate of growth (6.5% during FY06 and 2.7% during FY07) in net exports due to the dismal performance in the cut and polished diamonds segment.

Factors such as abolition of the Target Plus Scheme affected the exports during the first quarter of FY06. Under the above scheme exporters of medallions and coins used to register their exports in the jewellery category and these exports constituted a significant part of the jewellery exports due to their size. Besides, the change in the value-added norms, as per which value addition was to be calculated on the entire piece of jewellery (including diamond and precious stone content) instead of the earlier method, as per which only the gold content was considered as the base, also affected the exporters. Besides, heavy rains that flooded Surat and Mumbai affected the diamond exporters and disrupted office attendance, production and movement of goods. Further, owing to the market slowdown in the US, the sector witnessed a decline in exports during the last two quarters of FY06.

Sluggish demand from the US continued during FY07 as well. The exporters also faced delay in payments especially from the US. Moreover, there was a decrease in the diamond trading activities of bonded warehouses.

In FY08 the gems and jewellery sector showed resilience amid turbulent market conditions. The facility of duty-free treatment under the General Scheme of Preferences (GSP) for precious metals (other than silver) and articles of jewellery enjoyed by the Indian exporters was terminated by the US from July 1, 2007. The US GSP benefit was terminated on the grounds that the articles from India were exported in quantities exceeding the applicable competitive need limitation during 2006. After the termination of the benefit, a basic import duty of 5.50% was implemented on the precious metals and jewellery exported from India to the US.

However, the sector achieved a commendable export growth rate of 21.47% (y-o-y) during FY08 in the face of high interest rates, appreciating rupee, termination of GSP benefits and economic slowdown in major export markets. This growth could be partially attributed to the increase in trading activities. Moreover, fiscal measures such as reduction of import duty on cut and polished diamond (CPD) to 0%, reduction of import duty on un-worked corals and rough synthetic stones from 30% to 10% coupled with various trade facilitation measures undertaken by the government provided a boost to the sector. The appreciation of the rupee during FY08, which helped in increasing the competitiveness of gems and jewellery sector by making imports of raw materials cheaper, had also benefitted the sector to some extent.

However during FY08, India’s exports of gold jewellery recorded a significant moderation. Due to the volatility in gold prices in FY08 and global economic downturn, a slowdown in demand for gold jewellery was witnessed worldwide. Growth in the exports of gold jewellery moderated to 6.67% during FY08 as compared with a high growth rate of 34.18% during FY07.

During FY09, the global economic slowdown, which manifested during the second half of FY09, severely hindered the purchasing power of the jewellery customers, both external as well as domestic. In spite of this, the growth in the net exports during FY09 remained in the positive territory mainly due to the robust performance during the first half of the year. Despite the slump in exports of CPD segment (the CPD segment witnessed a decline of around 8% in exports in dollar terms), the sector was able to achieve a marginal growth rate of 1.32% in dollar terms on account of gold jewellery export sales, which clocked a high growth rate of 23.29% during FY09. Besides, tightening of foreign currency credit facilities and high interest rate during the first half of the year also adversely affected the CPD sector, which is heavily dependent on bank financing.

The overseas demand erosion, mainly from US led to postponement or cancellation of orders resulting in inventory build up, erosion of profit margins, shutting down of manufacturing units and retrenchment in the sector. However, the March 09 export figures point out to the fact that the pace at which the exports were declining has been arrested to some extent. Exports during March 2009 registered a decline of 16.75% on a y-o-y basis, while they were down by about 33.94% (y-o-y) during January 2009.

The contraction in the decline in exports continued during the first five consecutive months of FY10 as well. With the stabilising of demand conditions from India’s major trading partners, there has been a growth in exports in dollar terms from the sector since September 09. However, the export growth in rupee terms had turned positive since July 2009 mainly due to the depreciation of the rupee against the US dollar. The various incentives announced by the government for the sector to combat the slowdown have also in part helped the sector in its recovery.

Nonetheless, the increase in export growth rates since October 2009 can be partly attributed to the base effect, as export figures had started declining in absolute value terms since October 2008 due to the onslaught of the global financial crisis.

The growth in Gems and Jewellery exports has been primarily driven by the CPD segment over the years. As one of the largest cutting and polishing centre of diamonds in the world, the Indian CPD segment has always held the largest share in the total exports of gems and jewellery. India primarily focussed on exports in cut and polished diamonds owing to its traditional expertise in diamond cutting and polishing. Growing by around an annual average growth rate of 9%, this segment held an average share of around 83% in the net exports of gems and jewellery during FY92 to FY02. However, since, FY03, its share shrank to around 69%. Even though its share in net exports had fallen, it had continued to register an average growth rate of around 13% during the above mentioned period. CPD exports grew from US$ 7.11 bn in FY03 to US$ 13.02 bn in FY09; however, over the years, the fall in the share of CPD exports has been increasingly replaced by the growth in exports of gold jewellery.

The share of gold jewellery in India's net exports of gems and jewellery increased from merely 6.80% in 1990-91 to 16.50% in FY03 and to 32.47% in FY09. Exports of gold jewellery (as shown in the graph below) also witnessed an increase from US$ 1.51 bn in FY03 to US$ 6.86 bn in FY09 at a CAGR of 28.69%.

Recognising the growing acceptance of Indian gold jewellery in the world market the government had initiated several measures including a medium term strategy in FY06.

The following measures were a part of this medium-term strategy:

  1. Hallmarking and certification of gold to aid the development of Indian brands in the jewellery market.
  2. Integration throughout the jewellery supply chain from mining of raw materials to retailing of end products as well as joint venture manufacturing with the leading suppliers of the world.
  3. Developing market intelligence with a focus on key markets including NRIs.

Measures such as gradual liberalisation of gold import in the country and opening of gold trading in exchanges had also provided a boost to the gold segment.

The sustained buoyancy in exports of gems and jewellery over the years reflects the effects of continuing policy initiatives taken by the government over the years. As raw materials for the sector are largely imported, the government has focussed on reducing the barriers to import raw materials. Identified as a thrust sector which has prospects for export expansion and for employment generation under the Foreign Trade Policy of 2004-09, special policy initiatives had been announced to increase the competitiveness of the Gems and Jewellery sector.

Under the Market Development Assistance and Market Access Initiative scheme of the Government undertaken during the foreign trade policy of 2004-09, steps have also been taken to encourage: creation of training infrastructure to impart skills to artisans in jewellery designing; participation of exporters in international fairs, and arrangement of buyerseller meets abroad to showcase the quality and variety of Indian products.

The share of exports of coloured gemstones in India’s net exports is very small. Moreover, India is a net importer of pearls and synthetic stones. In fact, rough coloured gemstones, synthetic stones and raw pearls are largely imported for value addition and for preparation of final products, which are then sold either in the domestic or international market. India has a rich resource of highly skilled and low cost labourers which is effectively utilised by the Indian manufacturers in this sector for creation of highly value added goods.

Even though platinum jewellery is highly sought-after in the international markets, India does not export the same because it lacks natural resources for platinum; however, platinum bars are imported into India, though in very low quantities, as the demand for platinum jewellery is restricted to high-end customers and is not very robust.

SEZ Wise Exports

With an aim to provide special incentives to this highly export oriented sector the government has set up various SEZs and Export Oriented Units (EOUs) and Export Promotion Zones (EPZs). Santacruz Electronics Export Processing Zone (SEEPZ, Mumbai), Madras Export Processing Zone (MEPZ, Chennai) and Noida Export Processing Zone (NEPZ, Noida) are some such SEZs. The jewellery manufacturing and exporting units based in these SEZs primarily supply diamond-studded jewellery, while a few units in the domestic tariff area (DTA) supply plain gold jewellery. The gems and jewellery units, which are located only in SEZs and EOUs, have the facility of receiving precious metals such as gold/silver/platinum prior to exports or post-exports equivalent to the value of jewellery exported.

The export data from the various SEZs in India are given below.

Destination-Wise Exports

Indian handmade jewellery enjoys immense popularity among the Indian emigrant population. Over the years, the US, Hong Kong, UAE, Belgium, Israel, Japan Thailand, UK and Singapore have been the major export markets for the Indian gems and jewellery sector. The US is the largest importer of Indian gems and jewellery as it accounted for more than 29% of the total exports during FY06 to FY07. However, when the US economy was engulfed in recession, its share in India’s total gems and jewellery exports fell to 26.10% in FY08 from 31.47% in FY07. Also the 5.50% basic import duty imposed by US with effect from July 1, 2007 on the jewellery imported from India, that ended the US-GSP benefit on Indian jewellery, affected India’s export to the US.

However, over the last 2 years, exports to Hong Kong and UAE have grown rapidly. Exports of gems, jewellery and precious stones to UAE have grown steeply during the last three years. India’s export to UAE registered a growth of 34.94% during FY07 and 30.63% in FY08. This growth is driven by UAE’s growing tourism and multicultural population. It is expected that this growth momentum will continue and several other opportunities will open up in the Middle East market for the Indian gems and jewellery sector.

Considering that the slowdown in India’s traditional export regions such as US has affected the exports for this sector, India is looking towards diversifying its export market to Latin America, China, Russia and the CIS countries.

Imports of Gems and Jewellery

The raw materials required for manufacturing gems and jewellery are scarcely produced in India and hence, the sector heavily depends on imports. Thus, for this highly export oriented sector, one of the competitive disadvantage that it faces is the fact that most of the raw materials required are imported. Consequently, the manufacturers have to endure the risk of exchange rate and global commodity price volatility, which affects the profitability of the sector to a large extent. The government has time and again taken various measures such as: de-licensing gold imports; reducing the barriers to imported raw materials; lowering the customs and excise duties to facilitate imports and for enhancing the competitiveness of the sector. The total imports in the sector have witnessed a steady increase over the years, especially since FY03, which could be partly attributed to the various measures taken under the EXIM policies to facilitate imports of this sector. Total imports increased from US$ 5.81 bn in FY00 to US$ 7.71 bn in FY03 and to US$ 19.54 bn during FY09.

In recent years, India has been increasingly importing cut and polished diamonds. The CPD has been completely exempted from import duty (as on May 3, 2007); as a result, the imports of these diamonds saw more than two-fold increase during FY08 from FY07 and the trend continued in FY09 as well. Further, this exemption of import duty of cut and polished diamonds would provide a boost for the diamond sector and will enable India, which is one of the largest diamond manufacturing centres, to gain a strong foothold in the global market as a global trading hub for gems and jewellery.

India imports almost its entire requirement of rough diamonds. However, imports of rough diamonds during FY09 witnessed a significant decline of 23.19% (y-o-y). Even though low demand from domestic as well as external markets was one of the reasons, another reason could also be that the players in the diamond sector decided to reduce the import of rough diamonds for some time to ease the pressure on inventory and to help the sector face the challenge that had
risen out of turmoil in the global financial market.

While most categories of gems and jewellery imports declined during FY09, imports of gold bars and platinum bars witnessed a sizeable increase. The increase in imports of gold bars in value terms could be in part attributed to the steep rise in gold prices during FY09. Increase in gold price and its volatility, which continued during FY10, had an impact on the demand for gold in the domestic market. During the first 2 quarters of FY10, demand remained severely subdued; nonetheless, during the third quarter of FY10, demand for gold rebounded due to seasonal factors such as weddings, festivals et al.

In India, direct import of precious metals including gold is restricted to certain agencies and institutions. This leads to supply tightness during the peak season.

Importing Agencies for Gold

The following agencies / entities are entitled for direct import of precious metal

  1. Designated banks notified by the RBI-At present there are 23 banks that are approved by the RBI for this purpose
  2. Agencies / entities notified by the Department of Commerce:

In a recent move by the Ministry of Commerce & Industry (as on Feb 26, 2009) in order to ease the supply constraints the following agencies such as The Gems & Jewellery Export Promotion Council (G&JEPC), Premier Trading Houses & Star Trading Houses (only for Gems & Jewellery Sector) besides Diamond India Limited (DIL), MSTC Limited and STCL Limited have been added under the list of nominated agencies for the purpose of import of precious metals.

The government has also come out with the guidelines (as on Mar 31, 2009) where at least 10% of the imports of each designated importing enties will have to be supplied to the exporters. This is likely to benefit the exporters, especially the small players and improve distribution across the country.

Destination-wise Imports

India imports rough diamonds mainly from Belgium, UK, Israel, UAE, etc while gold jewellery is imported from Switzerland, South Africa, Australia, UAE etc. Raw pearls, precious & semiprecious stones are imported from Belgium, the UK, Hong Kong etc. Europe has been the largest importing destination for India followed by the Middle East, Oceania and Asia.

Factors Affecting Imports of Gems and Jewellery

Exchange Rate Volatility

The rupee-dollar exchange rate determines the manufacturing competitiveness of this sector by impacting the import cost. Rupee had started depreciating against the dollar since end-FY08, and during FY09, it witnessed a steep depreciation that resulted in high import cost of raw materials. Consequently, the profitability of the sector came under duress, as raw material cost constitutes a significant part of the production cost of gems and jewellery.

The depreciation of the rupee against the dollar, which would have provided some fillip to the export demand in normal market conditions, was not able to provide support as major export destinations were bearing the brunt of economic recession during FY09. Manufactures were, thus, not only facing a decline in demand due to global slowdown but also bearing the brunt of increasing cost of raw materials on account of rupee depreciation. The rupee, which continued to depreciate from April 09 onwards, started witnessing appreciation from October 09. While appreciation of the rupee might benefit exporters, it is unlikely to benefit importers through reduced import cost given the rise in the international prices of the raw materials.

Volatile Commodity Prices

Commodity prices, especially gold prices, remained highly volatile since 2008. The spike in the gold prices has affected the demand for gold jewellery in the domestic market during 2008. Besides, uncertainty in the global and domestic markets followed by retrenchment across the sectors, have led to postponement of purchase plans of gold jewellery among the gold customers. Faced with credit crunch and low demand conditions investors and bullion dealers have imported less gold to India during FY08.

According to the World Gold Council, in CY 2008, gold jewellery demand in India, traditionally the world’s largest gold market, declined by 15% while gold investment demand fell by 12%. The total demand for gold in India declined significantly by 83% (y-o-y) during Jan-Mar FY09 to just 17.7 tonnes owing to high price of the precious metal coupled with a slowdown in demand conditions in the domestic economy. High prices of gold as well as volatility kept the demand highly subdued during the first 2 quarters of FY10 as well. However, the demand witnessed a strong recovery during the third quarter of FY10, despite high prices, due to the festival (for example Diwali) and wedding-related purchases.

Outlook

With the gradual recovery in demand in the global economy and the efforts for diversification of markets by the domestic players, export in this sector is likely to pick up in the near future. Further, the e-commerce opportunities that are being explored by the players will also aid their plans to tap into new markets. The imports of gems and jewellery, on the other hand, will improve due to the buoyant domestic demand conditions, stability in the volatile prices of precious metals and appreciation of rupee, coupled with low currency volatility. However, the government also needs to continue to facilitate the players in this sector to help them gain a stronger ground.