CRISIL Research expects small and medium enterprises (SMEs), which make up 65-70 per cent of the gems and jewellery sector, to close this fiscal on a lacklustre note. The sector, which grew 7 per cent in value terms in fiscal 2019, is expected to witness a marginal decline in fiscal 2020 as export demand wilts.
Weak global demand, stricter lending norms, and a working capital crunch are expected to deliver a big blow to exports. Exports are down by about 6 per cent in rupee terms already in the first five months (April to August) of this fiscal. This is expected to hit Surat, India’s largest diamond cluster, which processes 80-90 per cent of the country’s diamond exports. SMEs, which form a large chunk of the cluster, will be especially hit.
To be sure, exports had faced headwinds even in fiscal 2019 — stringent lending rules, a working capital crunch, and a significant drop in demand for gold bars and coins as well as silver jewellery — though in rupee terms, demand increased due to rupee depreciation.
Domestic demand in volume terms, on the other hand, is expected to shrink due to skyrocketing prices and the slowdown in consumption. Domestic gold prices are expected to rise by 13-15 per cent year-on-year in fiscal 2020, tracking an increase in international prices due to heightened geopolitical tensions, US Fed rate cuts and an increase in import duty on gold to 12.5 per cent, from 10 per cent. This is expected to curb off-take.
Thus, SME clusters such as Thrissur and Coimbatore, which mainly manufacture plain gold and traditional jewellery, and cater mainly to the domestic market, are expected to be hit. In value terms, though, demand is expected to increase due to higher prices.