Demonetisation of high-value currency notes is expected to have a negative impact on consumer spending, especially for luxury items including gems and jewellery, Care Ratings said in a report.
The gems and jewellery sector is likely to be impacted at least in the medium-term, the rating agency added. Though export market and large diamantaires in the organised sector may not be impacted much, small and medium players, carrying out local trade and sourcing, are expected to feel the pinch of currency recall exercise, it pointed out.
Domestic jewellery retailers are expected to feel the heat of this move in the medium term, though the organised retailers are expected to withstand the impact of cash clean-up in a more resilient manner, the rating outfit maintained.
After a subdued demand scenario for exports of cut and polished diamonds (CPD) from India during large part of FY15 and FY16, which had also resulted in pressure on profitability
margins in the industry, some signs of revival in demand have been witnessed during first half of FY17, it said.
Though export in carat volume remained largely stable, the growth is mainly led by increase in demand from the US, the world's largest diamond jewellery market.
The decommissioning of Rs 500/1,000 notes may not impact the CPD industry, especially as the major market for polished diamonds lies outside India, the report said. Also, larger organised sector players undertake most of their transactions in the US dollar, with mainly employee expenses required to be paid in Indian rupee.
However, it is expected that small and mid-size diamond polishing firms having presence in the local trade could be impacted as such trades are targeted towards smaller unorganised jewellery players who would be starved of cash following this step of the government, Care said.
Further, it said the unorganised segment comprises around 7075 percent of the domestic gold jewellery market, although the share of organised jewellery retail segment is growing at 15 percent annually.
In H2CY2016, demand was earlier expected to be better due to wedding season, good monsoons and 7th pay commission implementation. However, demonetisation might impact consumer spending on luxury items, and domestic demand for gems and jewellery is expected to be muted in the near to medium term.
Even as quoting PAN had become mandatory for purchases above Rs 2 lakh, a lot of small ticket jewellery buys were being made in cash as more than 60 percent of the demand is estimated to originate from cash-dependent rural India. Though there was a brief spike in demand after the 8 November note ban, in the medium-term a slowdown in demand for jewellery is expected. But in the long-run, the move could turn out to be positive for organised sector, it said.
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Updated Date: Nov 29, 2016 08:46:34 IST