Indian gold sellers hit on both fronts: domestic sales and exports
After a sudden surge in demand for gold on the eve of demonetisation, which led to record high gold prices, the gold buyers seem to have all gone into hibernation. With 80% of the Indian currency turning into trash, people can no longer step into jewellery stores, making a display of wads of notes in return for the precious metal.
Even straight-laced, honest tax payers seldom buy jewellery electronically. This industry has been worst hit by the cash crunch in the short term and no amount of numbers and statistics can paint this picture better than the empty jewellery stores.
Shri Shravanthi Jewellers, a known name in the gold business in Southern India, saw its domestic business suffer great losses in the months after note ban as turnovers were slashed by 90%. Footfall in retail stores witnessed an all-time low, making the industry go through an unprecedented depression.
Countering this popular view, Uday Rathi, owner of Vishal Jewellers, Hyderabad, said that there hasn't been any adverse effect. "The only difference I've encountered is that earlier, we had 80 out 100 customers paying in cash, which has now translated into 60% cheque and RTGS payments. In my view, other retailers have also had a similar experience."
Talking about labour issues, Shreeganth S, owner of Shri Shravanthi Jewellers, Coimbatore said "Cash crunch didn't affect labour because 90% of the labour in gold industry is paid in gold, not in cash." The 1g wastage that is incurred in making of gold jewellery is bloated to 10g on its way to retail outlets due to value additions along the way, inclusive of labour costs.
"The demand will revive sooner or later. The lull in sales gave me ample time to speed up production and stock enough to be ready to meet orders promptly when normalcy resumes. Those who lacked working capital to do so had to cut down production by huge volumes, incurring losses," said Arun Saboo, CEO, SAP Jewels LLP, Hyderabad.
Voiding any positive regulatory impact of demonetisation, Shreeganth said that there has been no impact on the gold smuggling business. The old currency that was supposed to lose all its value has found its way back into banks. Hoarders of black money do business as usual and gold keeps coming in through unlawful channels, evading 10% customs duty.
"Demonetisation cannot bring down the unorganised sector. Unless there is a cut in customs duty, gold smuggling will flourish and regulation will suffer," said Jagdish Kamisetty, General Manager, Vasavi Bullion Corporation, Kurnool.
The Indian gold industry, recovering with great difficulty from the shock of demonetisation, has been further attacked by a sudden hike in UAE's gold import duty. UAE, which accounts for a third of India's gold exports has increased duty on gold imports from 0.36% to 5%.
With its annual exports to UAE averaging 60 crores, Shri Shravanthi Jewellers is a big player on the Indian gold exports market. Like all other exporters, only 25% of its export volume, which is meant for consumption in UAE, stands to be affected. The duty hike, not applicable to re-exports from UAE, will not tarnish Dubai's image as a hub of gold re-exports.
"It's still too early to judge the impact of the duty hike on the Dubai gold markets. We'll have to wait and watch. In the long term, I don't think demand will be affected due to 5% duty. We don't see an average 10% increase in gold prices every year preventing people from buying gold. The same logic applies here because the duty will be borne by the customers, not the exporters," Shreeganth S, owner of Shri Shravanthi Jewellers said.
Many have speculated that such a move by Dubai was motivated by revenue collection to finance projects like the Dubai Shopping Expo, the world's biggest shopping mall, targeting completion by 2020. The falling crude oil prices may have forced the governments in the middle east to consider alternative streams of revenue.
Many tycoons predict export bases in India shifting to UAE to avoid the duty. Meheer, from Ramniklal Sons, Ahmedabad, a jewellery exporting concern says that Indian gold exporters may open additional production untis in Dubai to escape the duty.
Also, foreigners may not see Dubai as the go-to shopping destination for gold jewellery anymore. The price difference from home countries simply may not be as attractive after imposition of the hike. Does that mean an increase in demand back home? We'll just have to wait and watch.