India's rising gold demand curbs diamond sales

Demand for gold in India has “significantly surged” following the government’s recent cuts on import duties, resulting in flagging diamond expenditure.

While the rising price of gold slowed down purchases in the first fiscal quarter of the year, India’s recent reduction in tariffs on the yellow metal — from 15% to 6% — has jump-started sales, according to a report that investment banking company JP Morgan issued last week. The government has declined to lower the import tax on polished diamonds.

“The significant cut in import duty on gold and the resultant decline in the landed cost of gold have been a shot in the arm for gold demand in the country,” said Kavita Chacko, head of research in India for the World Gold Council (WCG), in a market update last week. “Anecdotal reports suggest that there has been strong buying interest from jewelry retailers and consumers since the duty reduction.”

import duty cut drives down the domestic gold price

Despite a rise in international gold prices, domestic gold prices have fallen due to a significant 9% reduction in import duty announced in the Union Budget. The duty cut has reduced the landed cost of gold, leading to a 6% decrease in the domestic landed price since the cut was implemented.

Manufacturers at the recent India International Jewellery Show (IIJS) noted a substantial increase in gold purchasing among retailers preparing for the upcoming festive and wedding season, which runs through December. Orders are reaching levels not seen in several years, Chacko reported.

The growth in demand for gold jewelry correlates directly with falling prices for studded jewelry — items that contain natural diamonds — in India. An increased desire for synthetics may also have played a part.

“[The] consumer shift toward gold jewelry on the back of appreciating prices drove moderation in [studded-jewelry] sales growth,” JP Morgan explained, pointing to weak studded sales at some jewelers. “Demand moderation was particularly seen in [the] high-value studded and solitaire segment amid price correction and [a] potential impact from lab-grown diamonds.”

JP Morgan was not yet sure how well Indian consumers would take to synthetic diamonds. However, some of the larger players in the jewelry space have taken an interest in selling them, with retailer Senco Gold opening four new stores so far that carry lab-grown diamonds and other accessories, the report pointed out.

The larger jewelry retailers are also expanding their store networks overseas in order to capitalize on the increasing Indian diaspora market, as well as possibly attracting non-Indian consumers. By the end of the fiscal year, jewelry giant Titan Company aims to up its Tanishq-brand store count to 25 from the current 16. Kalyan Jewellers will launch its first store in the US ahead of Diwali, and Senco opened its first international location in Dubai during the first quarter, JP Morgan added.