Demonetization Woes

The entire gems and jewellery industry has been hit badly due to demonetization. However, the industry is hopeful of getting back to normalcy in the next six months, reports Diamond World.

Change is inevitable and the faster you adapt to change, better it is for your own survival. The Indian gems and jewellery industry has seen quite a few striking change during 2016, which included PAN card compulsory for gold purchase over Rs. 2 lakh, the forthcoming Goods and Services Tax (GST) regime. However, PM Narendra Modi’s announcement of demonetization of Rs. 500 and Rs. 1000 currency notes caused panic amongst the people as well as the gems and jewellery industry.

First few days have been full of confusion and surprise. “It was expected that there will be some difficulty for the first few days as 86 per cent currency is changed,” said FM Arun Jaitley.

The last few years have been tough for the industry especially after the 2008 financial crisis. The industry has already been facing the challenges in the form of drop in demand, threat from CVD diamonds, cash crunch, etc. And the latest decision to ban the Rs. 1000 and Rs. 500 currency notes has worsened the situation. The decision has brought the businesses especially in Surat and Saurashtra to a halt. Indian diamond industry is known to be polishing more than 80 per cent of world’s diamonds.

The move has certainly hit the Indian diamond industry where it hurts the most - the cutters and polishers who have the narrowest margin in the diamond value chain. As per various news reports, diamond units in Saurashtra, including Amreli and Bhavnagar doing job-work for diamantaires in Surat, are going through a difficult time ever since the demonetization move. The workers who polish diamonds here work in the farms in the morning and polish diamonds in the evening. Their wages are always paid in cash. Once the diamonds are polished, they are sent back to Surat through Angadiyas and cash payments are sent through angadiyas. In this scenario, the labour cost is too high for the diamantaires.

“The diamond units of Saurashtra are directly connected with Surat. Around 80 per cent of the units in Saurashtra do job-work for diamantaires in Surat. After demonetization, the diamantaires have stopped sending diamond parcels because they do not have cash to pay to the unit owners there,” Dinesh Navadiya was quoted by a leading daily.

The move has come at a time when the industry is already reeling under the pressures of slump in global demand for diamonds. Besides there are quite a few challenges for the industry as mentioned in the global diamond jewelry prepared by the Antwerp World Diamond Centre (AWDC) and Bain & Company – the midstream sector still needs to secure access to financing and continue to improve its business model to sustain profitability amid potential price volatility. Over the longer term, consumption may continue to slow in China, and there is a risk of a cyclical recession in the US. Synthetic diamonds as an emerging competing category to diamonds remain a risk, but diamond industry participants are determined to reduce the threat from synthetics by marketing the emotional attributes of natural stones.

Meanwhile, in India, new government anti–tax evasion initiatives could offset positive macroeconomic trends, while further rupee devaluation is likely to offset demand growth in local currency terms, says a report published by AWDC and Bain & Co.According to a statement by De Beers released on 13th December, the industry has been hit by India’s war against so-called black money after the government invalidated existing 500-rupee ($7.41) and 1,000-rupee bank notes. The company has responded by moving to ease restrictions on buyers in India as the government’s actions suppressed demand.

De Beers, the world’s biggest diamond producer, sold $418 million of diamonds in its 10th cycle, compared with $476 million at its previous offering, according to a statement on 13th December. For the same period last year, sales were $248 million.

“While the trade in lower-value rough diamonds is experiencing a temporary slowdown as a result of the demonetization program in India, demand across the rest of the product mix continued to be healthy,” Chief Executive Officer Bruce Cleaver said. “Overall sales remained in line with seasonal expectations.”