CRISIL SME Tracker: Weak demand is a painful cutback for diamond cutters

India’s gems and jewellery industry is facing weak demand from export markets for the third consecutive fiscal year. Moreover, a likely rebound in gold prices could deal a double blow by affecting domestic volumes.

As pent-up demand from the pandemic years fades and discretionary spending declines, small and medium-sized enterprises (SMEs), which account for about 70 percent of the sector’s turnover, face short-term challenges.

In the last fiscal year (FY24), exports of cut and polished diamonds, which account for about 60 per cent of India’s gem and jewellery exports, fell by almost a third year-on-year, and then by a further 20 per cent in the first quarter of FY25.

The subdued demand due to a change in spending patterns in the US — the largest market for cut and polished diamonds — is likely to have eroded exporters’ earnings in FY24. The SMEs are more vulnerable to demand fluctuations.

Elsewhere, international gold prices have risen from October 2023 on geopolitical tensions in West Asia. Prices could remain elevated in FY25 amid expectations that the US Federal Reserve will cut its policy rate.

While the inverse relationship between interest rates and gold prices is expected to support the performance of jewellery companies, a stronger than expected price increase could dampen domestic demand, which typically peaks in the December quarter.

A favourable monsoon will boost rural demand somewhat, which accounts for the bulk of domestic demand for gold jewellery. Performance across clusters in the industry is likely to vary depending on the segment’s expertise and export exposure.

The Surat cluster, the country’s diamond processing hub, is expected to show a decline in sales. In comparison, the Domjur, Coimbatore and Thrissur clusters, which specialise in gold jewellery and mainly supply the domestic market, are likely to outperform the export-oriented clusters.

First print: Aug 01, 2024 | 11:42 PM IST

Related Post