Battle lines drawn after reforms polarise India’s $45B gold trade
mumbai — India’s past and future are colliding in Anand Ghugre’s family jewellery shop in Mumbai.
“We still operate the way my father did for 50 years,” said Ghugre, 52, explaining that transactions were typically in cash and were not always recorded. “For small jewellers and the unorganised sector, most of our sales happen through personal connections. Sometimes, they don’t want bills, but the jewellers can’t say no to them.”
That way of doing business is under threat as the world’s secondlargest gold market faces Prime Minister Narendra Modi’s campaign to bring India’s informal economy to book. About three quarters of the estimated $45 billion of the precious metal that is traded in the country each year makes its way through thousands of family-run jewellery shops that have catered for centuries to the nation’s love of gold.
Modi’s financial reforms, including demonetisation and a new goods and services tax, combined with a younger generation that shops online, may usher in a wave of takeovers and mergers by big statewide and national chains as small shops are swallowed up or close.
“The one story that we hear is that the business is becoming problematic for smaller jewellers,” said Chirag Sheth, an analyst at London-based precious metals consultancy Metals Focus Ltd. “The bigger jewellers have deeper pockets, they have larger shops, better designs and better margins. It is very difficult for a smaller guy to compete.”
An overhaul of the fragmented industry is on the cards with the government said to be planning a new policy on gold that will bolster confidence among consumers. Fixing quality standards and allowing supply chains to be easily tracked are ways to enhance trust.
The government fixed GST on gold at three per cent. That will make it easier to track the flow of gold and harder to evade taxes, benefiting larger players like Tata Group’s Titan, Credit Suisse Group said in June.
The nation imports almost all the gold it consumes and demand last year was about 666 metric tonnes, according to the World Gold Council. That’s more than the entire gold reserve of the European Central Bank.
In 2015, national chains including Tanishq, owned by Titan, and regional players accounted for about 30 per cent of the market. That could rise to as much as 40 per cent within four years, the World Gold Council said in January. And assuming GST is implemented uniformly, the shift may happen even faster, said P.R. Somasundaram, the council’s managing director for India.
The new tax will increase paperwork and costs for smaller jewellers as they try to conform, said Sheth. Jewellers will now have to file as many as 37 returns, he said.
For the big players, the reorganisation of the industry will improve their credit profile, according to ICRA Ltd, the local unit of Moody’s Investors Service, which predicts a round of consolidation, where “organised players may acquire smaller entities or enter into franchise agreements.”
Over the medium term, revenues of those retailers would grow at five per cent to six per cent, almost double the overall industry rate, according to Crisil Ltd, the Indian subsidiary of S&P Global.
Lack of transparency in the sector made it difficult for domestic banks to lend to jewellers looking to develop workshops and hire more workers, the WGC said. But the current optimism over the industry has seen overseas investors pumping in money to bigger jewellers.
In April, Warburg Pincus raised its investment in Kerala-based Kalyan Jewellers to ₹17 billion. Kalyan and fellow south Indian retailer Malabar Gold & Diamonds plan initial public offerings within the next two years. — Bloomberg