The Indian Economy
The Indian economy is one of the largest economies in the world with a GDP at current prices in Fiscal 2010 estimated at ` 57.91 trillion (approximately US$1.3 trillion). It is one of the fastest growing economies in the world, with a real GDP growth rate of 5.7% for calendar year 2009 and a projected 9.7% growth rate for calendar year 2010 (Source: International Monetary Fund, World Economic Outlook, October 2010 Update). Per capita GDP at factor cost (at constant prices) in India has grown from around 12,031.72 billion for the year 1991 at the time of liberalization to an estimated 41,039.70 billion for the year 2010. During the first quarter of Fiscal 2011, India’s GDP grew by 8.8%, compared with a growth rate of 6.0% during the first quarter of Fiscal 2010. The IMF believes that four principal factors have supported Asia’s recovery: first, the rapid normalization of trade, following the financial dislocation in late 2008, benefited Asia’s export-driven economies; second, the bottoming out of the inventory cycle, both domestically and in major trading partners such as the United States, is boosting industrial production and exports; third, a resumption of capital inflows into the region has created abundant liquidity in many economies; and fourth, domestic demand has been resilient, owing to strong public and private companies in many of the region’s economies. The IMF believes that, in both China and India, particularly, strong domestic demand will support the recovery. In India, the growth in real GDP will be supported by rising private demand, with consumption strengthening as a result of improvements in the labor market, and a boost to investment brought about by strong profitability, rising business confidence and favorable financing conditions.
Indian Gems and Jewelry Industry
Precious metals and gemstones have been an integral part of the Indian civilization throughout its recorded history. Gems and jewelry has been consumed by Indians for centuries for both their aesthetic as well as investment value. India has the distinction of being the first country to introduce diamonds to the world. The country was also the first to mine, cut, polish and trade in diamonds.
The Indian gems and jewelry industry can be classified into various sub segments for diamonds, colored stones, gold and silver jewelry, pearls, and others. However, the two major industry segments in India are gold jewelry and diamonds. India dominates the diamond processing trade with 11 out of 12 diamonds being cut and polished in India (around 80% in terms of carats and around 55% in terms of volume). India 55 also dominates gold and silver consumption globally with consumption of approximately 700 tons (gold) per year. As a major foreign exchange earner, the industry also provides employment to approximately 1.5 million people directly and indirectly.
The Indian gems and jewelry industry is one of the world’s most competitive markets due to the low cost of production and highly skilled labor. According to the Federation of Indian Chambers of Commerce and Industry (FICCI), the Indian Gems and Jewelry industry – consisting of the domestic and the export market has the potential to grow from the current US$45 billion to US$100 billion by 2015.The domestic market of gems and jewelry is estimated to be in the US$ 18-20 billion range. Given the fragmented nature of the industry it is difficult to put a finger on the exact size. The industry is expected to grow at around 13% annually and at this rate it could reach US$ 35-40 billion by 2015. Currently the domestic gems and jewelry market is fragmented across the value chain. There are more than 300,000 players across the gems and jewelry sector, with majority of them being small unorganized players who are operating on wafer thin margins. Organized retail of jewelry thus presents a significant opportunity to create additional value through higher margins, which would be possible through differentiation and branding. With the onset of organized retail in the last decade, lots of new players have entered the space. Currently modern retail players in jewelry space have only 5%-7% share of the total jewelry market, but this number would increase considerably in the near future.
Precious Metals and Gems
Gold is more than a precious metal in Indian culture and is truly entrenched in India’s culture. For hundreds of years, gold has been an important part of the Indian society and fused well into the psyche of an Indian. There is a tradition of buying gold during auspicious occasions such as Diwali, Akshaya Tritiya, Dussehra, and also during weddings. In rural India, farmers typically buy gold jewelry after a successful harvesting season as it is valued for its investment characteristics and as a hedge against inflation.
In 2009, total Indian gold consumption reached US$19bn or ` 974 bn equivalent at the end of 2009. Over the past decade, this has increased at an average rate of 13% per year, outpacing the country’s real GDP, inflation and population growth by 6%, 8% and 12% respectively. Gold jewelry demand in India, the world’s largest gold jewelry market, rose 67% year-on-year to 272 tons in the first half of 2010. Over the same period, the average domestic gold price surged to almost ` 52,800/oz, before hitting a new high of ` 60,460/oz on October 15, 2010. Despite the higher gold price, market sentiment remains positive, especially with the local gold market also benefitting from the strengthening of the rupee against the US dollar. India is the biggest consumer of gold in the world. To meet Indian consumption requirements for jewelry and investments, India imported 590 tons of gold in fiscal 2009. Almost 95% of the gold imported to India is used for jewelry. The major countries which supply gold to India are Switzerland, South Africa, Australia and the United Arab Emirates. A majority of gold in India is sold in retail sales and a small portion is held as reserves with the central government treasury.
According to the CARE Report, the consumption of gold in India has doubled over the past two decades – going up from approximately 400 tons in 1987 to about 800 tons in 2007. In 2009, gold demand in India was severely affected due to the global financial crisis, record high prices of approximately ` 18,232 per 10 grams during November 2009 and high volatility in gold prices (with gold prices increasing in the third quarter of fiscal 2010 by an annualized average of 19.7%). During the fourth quarter of fiscal 2010, gold imports in India increased 74% year-on-year to 126 tons and the CARE Report predicts that this growth will continue through the third quarter of fiscal 2011 assuming relative gold price stability and the rising demand for gold as an investment.
Gold jewelry accounted for around 75% of total Indian gold demand in 2009, the remainder being investment (23%) and decorative and industrial (2%). Indian consumers also regard gold jewelry as an investment and are well aware of gold’s benefit as a store of value. Wedding-related demand accounts for a substantial proportion of overall jewelry demand. This is particularly true in the south of India, where the most popular wedding jewelry sets tend to be the more traditional, intricate but bulky styles in heavier weights. In the northern cities more „western‟ styles, lighter wedding sets, as well as diamond-set pieces, are becoming increasingly popular.
The CARE Report indicates that along with gold, silver enjoys a special place in the psyche of the Indian consumer and is considered the second-best investment option in precious metals. In the last two years, silver prices have grown significantly in line with the rise in gold prices resulting in a decline in demand for jewelry and fashion accessories. Going forward, CARE Research expects that the silver price movement will tend to follow the gold prices as the prices of silver and gold in Rupees have shown a correlation of 0.98 in the last 10 years. Diamonds India is one of the leading diamond processors in the world. With the rise in gold prices, consumers are turning to diamond-studded jewelry which gives them a higher perception of luxury and value. The craftsmanship and low cost of Indian diamond processors has given India a competitive edge in diamond cutting and polishing. The CARE Report indicates that India accounts for approximately 55% of the global polished diamonds market in terms of value, 80% share in terms of caratage and 92% in terms of pieces.
Demand and Supply India experienced the highest growth in jewelry demand, posting an increase of 36%. A rise in the value of the rupee against the US dollar offered Indian consumers some degree of protection from the full extent of the rise in the US$ price during the quarter. Demand increased to 184.5 tons from 135.2 tons a year earlier. In local currency value terms demand reached a remarkable ` 338bn, 67% higher than the same period of 2009. Restocking by the trade ahead of the fourth quarter festive season was a key driver of growth. The India International Jewelry Show (IIJS) in August in particular witnessed enthusiastic demand. Given the dual purpose of Indian jewelry, as both an adornment and an investment, the rising price helped to support demand for jewelry. Furthermore, consumers have adjusted their price expectations and are anticipating yet higher prices. This has had the twin effects of further reinforcing investment-related demand for gold jewelry while also encouraging consumers to purchase gold now rather than defer purchases to a time when prices are higher.
Manufacture of Jewelry
Jewelry manufacture, diamond polishing and setting is a process that requires significant skill. Although machines can perform some part of the work, the process is very labor intensive. India, with its availability of low-cost skilled labor is in a position to deliver products of good design and quality at a low cost. India has well-established capabilities in manufacturing hand-made jewelry in traditional as well as modern designs. Indian hand-made jewelry has ethnic demand in various geographies with a high Indian population like Middle East, the US and Canada. With traditional hand-made jewelry, India has also progressed in using the latest technologies in diamond-processing and jewelry-making. Many of India’s jewelry manufacturing companies are now equipped with latest Computer Aided Design /Computer Aided Manufacture systems and other advanced software programs. The diamond processing companies have modern equipment, such as laser machines, automatic and semi-automatic bruiting machines and auto planners. India also has an ample professionally-trained workforce which is well-versed to operate the latest equipment. Jewelry Retail Branded jewelry has been a relatively recent phenomenon in India because most jewelry is sold in the unorganized sector. Consumers have become more informed about the quality and certification of gold jewelry and are now insisting on certification. Traditionally, gold has been purchased because of its investment value along with aesthetic value, unlike in countries other than India, where it is bought only for ornamental purposes. With changing demographics, the branding of jewelry and the retail revolution, young customers (from age groups of 20-40 years) prefer buying jewelry for fashion rather than for investment. Many companies have started investing in brand-building exercises for their products. All these efforts are expected to result in higher growth in the branded and therefore also organized jewelry market.
The branding of jewelry in India follows the pattern in the international market where 90% of the jewelry is sold as a fashion accessory or as everyday wear and not as an investment. Branded jewelry in India is positioned as a lifestyle and personality statement. There has also been a shift in consumer preference towards diamond-studded jewelry due to the extensive positioning of diamond-studded jewelry as both affordable and contemporary. Another key development in branded jewelry has been the introduction of value added services such as the certification of gold and diamonds, and lifetime return and buy-back schemes. These trade practices have resulted in the perception of superior quality being associated with branded jewelry. The new generation of jewelry purchasers does not have ongoing relationships with local jewelers and prefers to buy branded jewelry.
In India, organized retailers account for a mere 4% of the total jewelry retail market. This is because of the buyers‟ preference and trust in their neighborhood goldsmith. Even the standardization of designs is not possible due to varying local tastes. There are about 15,000 vendors across the country in the gold processing industry, with over 450,000 gold smiths spread across the country. There are also more than 6,000 vendors in the diamond-processing industry. Organized vendors have been growing steadily, carving a market share of 4% of the industry. With consumer preference for fine quality goods, branded jewelry, hallmark certification and maturity in the jewelry market, organized retail share is expected to grow. Elevated gold prices, higher borrowing and operating costs, makes the survival of family-owned jewelers difficult as well. Pricing Gold is a renowned metal not only for its traditional use for adornment but also for its stance as a time-tested investment-class asset. The price of gold is determined by the fundamental demand-supply dynamics of the gold bullion market. Gold is considered to be a relatively safe investment in times of economic volatility and uncertainty. With the recent weakness and high fiscal debt levels of major western paper currencies, gold has attracted many investors, as evidenced by gold’s record high prices in the last two years. The Indian consumer is generally regarded as sophisticated and price sensitive and remains very risk averse when the prices are volatile. When prices are high an increase in sales of scrap gold is often observed and conversely when prices fall or show signs of stability, it results in an increase in demand.
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