Rupee fall, import duty to hit domestic jewellers hard

Constant raise in import duty for gold also hit jewellers' profitability

The Rs 250,000-crore domestic jewellery sector is likely to be hit hard by frequent rises in gold import duty and the sustained depreciation of the rupee against the dollar.

Since January 2012, the government raised import duty on gold about eight times---from Rs 300/10 g ad valorem to eight per cent. During the same period, the rupee depreciated about 10 per cent.

Today, the currency hit a record low, closing at 58.14 against the dollar, compared with 53.31 in January 2012.

In the last two months, Rough diamond prices have surged 10-12 per cent, primarily due to mining disruptions in South Africa. This has taken a toll on sales of domestic studded diamond jewellery.

Exporters, however, wouldn’t be affected, as about 95 per cent of their businesses are naturally hedged. Local jewellery manufacturers, however, would see resistance from buyers, considering the current import duty and the value of the rupee against the dollar.

Jewellers charge about 10 per cent as making charges. Considering three per cent value-added tax and other local levies, consumers in India would have to pay about 30 per cent extra over prevailing global gold prices. “The business of local jewellers would be affected by these additional levies and depreciation in the Indian rupee,” said Shreyas Doshi, chairman, Shrenuj & Co, a Mumbai-based jewellery manufacturer and exporter.

For jewellery exporters, raw materials such as gold and diamonds are available in dollar terms. Also, the duty component of jewellery exports is claimed for refund under the Duty Entitlement Passbook Scheme. Therefore, the duty paid on raw materials for exportable jewellery is refundable. Since the margin component of about five per cent isn’t hedged, jewellery exporters’ incomes from foreign sales vary, depending on the variation in the rupee. Therefore, in case the rupee falls, exporters push to expedite receivables to generate additional surplus cash in their accounts. “To fetch more money, we are pushing for more export contracts and expediting receivables,” said Mehul Choksi, managing director of Gitanjali Gems.

Overall, jewellery exports in dollar terms declined 9.42 per cent $39 billion in 2012-13, compared with $43 billion in 2011-12. Depreciation in the rupee, however, kept the sentiment high, with jewellery shipments recording a jump of 3.18 per cent to Rs 2.12 lakh crore during 2012-13, compared with Rs 2.06 lakh crore in the previous year.

The government argues the rise in the import duty on gold would encourage individual customers to invest in other asset classes, reducing gold imports in India. This would help reduce the country’s current account deficit.

Jewellers believe their business would be hit by the two-way impact on gold prices, which would make gold costlier in India than in other countries. This would, in turn, encourage gold smuggling and create a parallel economy.

Chief Economic Advisor Raghuram Rajan has hinted the government may take more steps to curb gold imports. In April and May, monthly gold imports averaged 152 tonnes, against an average of 70 tonnes in 2012-13. High gold imports is one of the primary factors behind the high CAD, which touched a record 6.7 per cent of gross domestic product in the quarter ended December 2012.