By Dr. Uday Lal Pai
India, the largest gold jewellery producer in the world, expects to attract foreign direct investment worth US$ 2 billion in this fiscal. India has a positive future in GJ sector that would be driven by increased exports to the US and other markets and growth in domestic consumption.
Gem and jewellery (GJ) sector is one of the fastest growing sectors in the Indian economy. Availability of skilled manpower, together with liberalized government policies has helped in the continuous growth of this sector, thereby making it a leading foreign exchange earner. India has been on the forefront, making an indelible mark in the global diamond and jewellery market year after year.
GJ exports accounted for 14.81 per cent of the total exports during January-December 2005; Total GJ exports grew to $17 billion from $14.8 billion.
The GJ sector consists of cut and polished diamond, gold jewellery, colored gemstones and silver jewellery sectors.
In the last fiscal 2005-06 (Apr-Mar), India's export of GJ rose to US$ 16.67 billion, a growth of more than 6 percent, the GJ Export Promotion Council (GJEPC) said. The GJ sector is likely grow at 20-25% in 2006-07 (Apr-Mar), aided by new opportunities in the diamond segment, says Bakul R. Mehta, chairman of GJEPC, said. The country has the potential to become the next global trading hub of gems and jewellery, he added.
The growth drivers
The forward integration into jewellery manufacturing for export markets by Indian companies, which began in the late 1980s, has now turned the country into the fastest growing jewellery manufacturer in the world. It is not just the growth in exports but an overall development that this industry has attained, spurred by policy changes implemented by various governments over the past decade and even before.
According to data from the precious metal consultancy, GFMS Ltd, India with gold jewellery production of 539 tonnes in the calendar year 2005 was numero uno followed by Italy with 228 tonnes. Third spot went to China with 198 tonne and Turkey was fourth with 197 tonne. If scrap gold is included, India again emerged as No 1.
Recently, the Federazione Nazionale Orafi Gioiellieri Fabbricanti Aderente a Confindustria or Federorafi, which is the federation of Italian jewelers, said India has relegated Italy to second place in gold jewellery production.
Federorafi said India surpassed Italy due to "competitive production costs, better access to global markets due to lower customs tariffs, good product quality and a huge internal market," which they say is not accessible to Italian/European goods due to high tariffs and due to administrative barriers. It said Italy lost out due to high labour costs, absence of trade reciprocity from other countries, towards non Organization for Economic Co-operation and Development countries (India, China and South America amongst others), high rate of exchange of the euro compared to other currencies and difficulty in checking the distribution of goods.
The expansion of Special Economic Zones (SEZs) through both an increase in the capacity of the existing ones, as well as the setting up of new zones, is rapidly augmenting capacities in this sector. For example, the Seepz SEZ in Andheri in suburban Mumbai, with over 100 modern units and employing 35,000 workers, now has the single largest concentration of jewellery manufacturing facilities in the world.
Domestic market
As India makes rapid progress in the retail arena, the jewellery market is undergoing a gradual metamorphosis from a 'storehouse of value' to a fashion accessory bazaar. Plain gold has now given way to diamonds, platinum and colored gemstones.
Traditionally, Indians bought jewellery only from a 'family jeweler' based on a relationship cultivated over, sometimes, generations. Now, the 'family jeweler' is gradually being replaced by branded jewellery makers.
Currently, some of the world's biggest names in the jewellery and luxury items such as watches and cuff-links are making inquiries to set up shop in India. Multi-national jewellery brands such as Tiffany, Cartier, Zales and Harry Winston are in the process of establishing shops in India following the government's decision to allow foreign direct investment of up to 51 per cent in single brand retail stores. Most of these stores have been sourcing cut and polished diamond and gold items from Indian firms.
A large part of this growth was fuelled by the branded segment, which hurtled northwards at an amazing growth rate of 40 per cent. According to a study by consulting firm McKinsey, the branded jewellery market in India would touch US$ 2.28 billion mark by 2010.
Diamonds have not become cheap. The 'carat' is still as costly as ever. Now as the buying capacity has increased, the marketing is being done aggressively so the customers get attracted," explains a market observer. The country currently has 35 retail jewellery brands.
To monitor the quality of gold and silver jewellery sold in the country, the Government has asked the Bureau of Indian Standards (BIS) to set up 500 surveillance centers across the country. The move comes after tests carried out by Government inspectors found out that the majority of jewellery shops in the country were selling jewellery that were below the prescribed standards.
"The BIS has been asked to set up about 500 surveillance centers all over the country so that no cheating takes place for small investors in gold and silver. These centers would shortly become operational in major metropolis and other cities," the Minister of Company Affairs, P.C. Gupta, said.
Diamond Manufacturing
At present, India is the world's leading diamond cutting and polishing centre. The Indian cut and polished diamond manufacturing industry is expecting a growth of 15 to 20 per cent growth in 2005. The US$ 1.6 billion-strong Indian diamond business is expected to grow at a rate of 20 per cent with diamond industry successfully building confidence in the consumers, experts feel.
"The growth in mini-metros' is encouraging and they are growing at 25 per cent compared to 18 per cent in other metros," stated Prasad Kapre, business director, Diamond Trade Corporation (DTC), an apex body covering the trade. The diamond giants contend that the customers' "walk ins" inquiring about diamonds have increased over past decade.
"We have given confidence to the consumer to walk in and buy diamond," Kapre stated pointing out to the series of diamond campaigns with catchy slogans. Diamond industry, which employs three million people, has also contributed to country's foreign exchange revenue to the tune of USD 14 billion, he said.
From being a leading diamond manufacturing centre, India has rapidly advanced on the path of becoming the global hub for gems and jewellery. And believe it or not, close to 90 per cent of the US$ 22 billion worth industry mostly comprise entrepreneurs with less than US$ 111 million turnover, or SMEs.
If the United States accounts for 50% of the global diamond consumption, India leads the globe in diamond manufacturing with 60% share in value, 85% in volume and 92% share in the number of pieces produced. While these statistics are impressive enough in themselves, it is the scale, breadth and depth of the industry which add the final sparkle to the sector.
Gold Jewellery
According to the Associated Chambers of Commerce and Industry of India (ASSOCHAM) India's gold jewellery exports are poised to rise to $6.77 billion by 2010, against its current export size of 3.76 billion. By 2015, Indian gold exports would further accelerate to $10.3 billion, it added.
India will continue to remain the largest consumer of gold, the ASSOCHAM states, while projecting that domestic gold demand is expected to rise to 980.83 tonnes by 2010 and to 1152.64 tonnes by 2015, against the current demand of 800 tonnes.
India will continue to remain the largest consumer of gold while projecting that domestic gold demand is expected to rise to 980.83 tonnes by 2010 and to 1152.64 tonnes by 2015, against the current demand of 800 tonnes. India imported an estimated 443 tonnes of gold during in the first six months of the current fiscal, valued at $5.82 billion. The domestic gold production was estimated at 3.05 tonnes during the financial year 2006, as compared with 3.53 tonnes during 2005.
India as of now estimated to hold nearly 14,000 tonnes of gold, accounting for 9 per cent of the world's cumulative production of around 153,000 tonnes. India's import percentage of gold bars in 2005 stood at 7.4, while the figure up to July 2006 is 6.6, making it one of the largest purchasers of coins and bars for investments, ASSOCHAM states.
Government Initiatives
The government of India (GoI) has been quite supportive of the industry in introducing policies time and again that help boost exports.
The import of gold of 8 carat and above was allowed under the replenishment scheme subject to the import being accompanied by an Assay Certificate specifying the purity, weight and alloy content. Duty free import entitlement of consumables for metals other than gold and platinum at 2 per cent of the FOB value of exports during the previous financial year.
The government also allowed duty free import entitlement of commercial samples at US$ 6,762, duty free re-import entitlement for rejected jewellery at 2 per cent of the FOB value of exports. The cutting and polishing of GJ is treated as manufacturing for the purposes of exemption under Section 10A of the Income Tax Act.
Customs duty on rough diamonds and colored gem stones, semi-processed, half-cut and broken diamonds has been abolished while that on cut & polished diamonds and colored gemstones has been reduced from 15% to 5% by the Government. This step will definitely boost the gems & jewellery market.
In the foreign trade policy for 2004-09 (April-March), commerce minister Kamal Nath had unveiled a string of measures, to develop the sector. The policy removed various hurdles to exports. But there is still enough room for changes and developments that need to fall in place to encourage foreign direct investment in the sector and for mining companies set up operations in India.
The Government has constituted an expert committee to look into the potential of the GJ industry and come up with recommendations to enable the country to become a hub for this sector. "The Indian GJ industry is now set to make a quantum leap forward. The Finance Minister has announced to set up an expert committee to consider the recommendations by the sector which will help India transform into an international GJ trading hub," the GJ Export Promotion Council Chairman Bakul R Mehta said.
In line with the strategy laid out in the latest annual supplement to Foreign Trade Policy to make India the global hub for diamond market, the Department of Commerce has set off a series of initiatives with major diamond producing countries and Russia in particular in recent months.
The future indications
The gems & jewellery (G&J) industry is expected to grow at a rate of 15-20 per cent this year, said Bakul Mehta, chairman, Gems & Jewellery Export Promotion Council." The industry faced a slowdown last year but this year we are expecting a growth rate of 15-20 per cent'', he said.
"The sector has huge potential. What we want to do is import polished diamonds, process them here (India) and re-export," says. "It's a huge business and we want it to move to India," he said. Currently, diamond-processing activity is concentrated in West Asia and Europe. Indian traders are mainly involved in cutting raw diamonds.
"We are confident of bringing in FDI of $2 billion (in terms of working capital) this year," GJEPC chairman Bakul Mehta said.
The council is also targeting a growth rate of 20-25 per cent in exports during the current year as against the growth rate of 6.32 per cent in last fiscal, he said, adding that a combination of factors like government policies, the new Foreign Trade Policy, the SEZ norms would help achieve us meet this growth rate.
Industry is in a stage of consolidation and the slow off take in the US market due to high interest and high value of gold are the main reasons for the low growth rate this year, Mehta said.
The Gems & Jewellery industry has a target to achieve 65 percent of the international market by 2010. The sharp increase in the exports of GJ during recent years is primarily attributable to pick-up in demand in major markets like the US, Belgium, Israel, and Hong Kong. GJ exports have also benefited from the supportive policy measures of the GoI.
Minister of Company Affairs, P.C. Gupta said that India is on the way to become the global hub for gold. "With the commencement of futures trading in the metal, India is no longer looked as a price taker or price seeker of the gold. With the demand for the precious metal going to over 800 tonnes in recent years according to the estimates of the World Gold Council, there is potential for the country to become a price-setter in the international market," said Gupta.
A study by ICRA says the GJ exports from the country are likely to touch $20 billion by 2007 with buyers from the US and European Union increasing bulk purchases of diamond studded jewellery from India because of its affordability. It said India has achieved a reputation of being world's leading diamond cutting and polishing centre for smaller stones. Now industry leaders are looking to process larger stones to clock greater growth by utilizing modern advanced technologies besides cheap abundant labour.
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