CRISIL SME Tracker: Weak demand a painful cut for diamond polishers

In the FY24, exports of cut and polished diamonds, which account for about 60 per cent of India's gems and jewellery exports, fell nearly a third year-on-year

India’s gems and jewellery industry sector is facing weak demand from the export markets for a third consecutive financial year. To boot, a likely upturn in gold prices could land a double whammy by impacting domestic volume.
 

With pent-up demand from the pandemic years abating and discretionary spending moderating, small and medium enterprises (SMEs), which account for about 70 per cent of the industry revenue, have run into near-term challenges.
 

In the last financial year (FY24), exports of cut and polished diamonds, which account for about 60 per cent of India’s gems and jewellery exports, fell nearly a third year-on-year, and then another 20 per cent in the first quarter of FY25.

 

Subdued demand consequent to a change in spending patterns in the US — the largest market for cut and polished diamonds — is likely to have culled the revenue of exporters in FY24. The SMEs are more susceptible to demand fluctuations.
 

Elsewhere, international gold prices have been rising from October 2023 following geopolitical tensions in West Asia. The prices may remain elevated in FY25 amid expectations of the US Federal Reserve cutting its policy rate.
 

While the inverse relationship between interest rates and gold prices is expected to support the realisations of the jewellery companies, a sharper-than-expected rise in prices can dampen domestic demand, which usually peaks during the December quarter.
 

A favourable monsoon will lend some traction to rural demand, which accounts for most of the domestic demand for gold jewellery. Cluster-wise performance in the industry is likely to vary, depending on segmental expertise and exposure to exports.

The Surat cluster, the country’s diamond processing hub, is expected to clock a contraction in revenue. In comparison, the Domjur, Coimbatore, and Thrissur clusters, which specialise in gold jewellery and primarily supply to the domestic market, are likely to outperform the export-oriented clusters.