CRISIL Research expects the twin blows of high gold prices and weak global demand to hit the gems and jewellery sector hard in the current fiscal year (FY21). Small and medium enterprises (SMEs), which make up 65-70 per cent of the sector, will be particularly impacted.
The sector is expected to contract by 35-40 per cent in value terms in FY21, as both domestic and export demand get impacted by the Covid-19 pandemic.
Revenues of Indian exporters are expected to be hit by the global growth slowdown, decline in world trade, and postponement of global trade events and diamond and jewellery shows. Exports in the first quarter declined about 75 per cent year-on-year (YoY).
The downturn in exports 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 hit especially hard.
Domestic demand, on its part, is expected to shrink in volume terms due to soaring prices, store closures during the lockdown, and limited discretionary spends since. Domestic volumes declined about 70 per cent in the first quarter.
Domestic gold prices are expected to rise 30-35 per cent YoY in FY21, mimicking global prices, due to heightened geopolitical uncertainties, recessionary fears, US Fed rate cuts, and rupee depreciation. This is expected to curb offtake.
In value terms, however, demand is expected to be hit to a lower extent due to higher prices. With gold prices projected to rise this fiscal year, people are expected to invest more in bars and coins.
Thus, SME clusters such as Thrissur and Coimbatore, which mainly manufacture plain gold and traditional jewellery, and cater largely to the domestic market, are likely to be hit.