Demonetisation: A Boon for Jewellers

The Government’s decision to ban old `500 and `1000 notes from midnight of November 8 was received warmly by the gems and jewellery industry as jewellers witnessed massive footfalls following the announcement.

On November 8, the jewellery industry welcomed the government’s decision to ban old 500 and 1,000 notes, saying gold demand will rise as people will have more faith in the precious metal than the currency notes. With bullion usually purchased in cash in India, the announcement led to frenzy among people wanting to convert their cash hoard into gold.

Buyers flood stores to convert cash into gold

No sooner did Prime Minister Narendra Modi concluded his ‘surprise’ address on November 8 on National Television, jewellery shops in different parts of India saw heavy rush with people wanting to buy gold coins and jewellery with 500 and 1,000 denomination currency notes. “There was a gold rush in late night hours in some pockets of Ahmedabad, Vadodara and Rajkot towns. Not all the jewellers were operational but only limited showrooms were open. The prices increased because demand surpassed the available stock,” Shantibhai Patel, President of Gem and Jewellery Trade Council of India (GJTCI) told Hindu Businessline.

“It is a welcome step to curb tax evasion even as people will be inconvenienced for a short period. It is a very bold step for the long run and will benefit people,” All India Gems and Jewellery Trade Federation (GJF) Director Ashok Minawala told PTI. The act of demonetising high value currency notes by the government is a decisive step to curb tax evasion and improve compliance and an important milestone in the journey towards the vision of becoming a cashless economy according to World Gold Council Managing Director, India, Somasundaram PR. “This will be transformative for gold as this has the potential to squeeze out the unofficial trade, and drive greater transparency across,” Somasundaram told Indian Express.

Gold prices touched a three-year high of `31,750 in Delhi on November 9 as people flocked the jewellery stores post demonetization. Some jewellers said that they had to keep the stores open until late night to cater for demand. One of the jewellers said that the price shot up as people heavily exchanged 500 and 1000 notes even for lower value while buying the precious metal. It’s believed that some people may have offloaded a portion of stashed cash to buy gold last night, fearing a hardening of crackdown on black money in the coming days. Demonetisation also spurred some wholesalers to boost prices by as much as 23 per cent, said Kumar Jain, owner of U.T. Zaveri jewelry store in Mumbai to Bloomberg.

Spike in gold demand is short-term

According to Bachchraj Bamalwa, Director of All India Gems and Jewellery Trade Federation, the Demand in the second-largest bullion consumer will dry up soon as the cash supply dwindles reported Bloomberg. Modi’s move will hit jewellery purchases further in the next few months. Elevated prices and India’s push for more transparency on purchases and income disclosure will cut demand in coming months. Rajesh Mehta, Founder and Executive Chairman of gold exporter and retailer Rajesh Exports told Forbes, “There will be volatility until the new currency notes come in to circulation.” Mehta anticipates a 4 per cent decline in retail jewellery sales over the next 30 days.

The immediate effect may be a very short-term splurge of spending on gold jewelry and other high value articles as individuals seek to offload the soon-to-be obsolete notes, said Tom Kendall, head of precious metals strategy at ICBC Standard Bank Plc, reported Bloomberg. “This latest effort to crack down on the informal sector may be helpful in squeezing out undeclared gold flows.” Shops were kept open for longer on November 9 in Zaveri Bazaar to tap the demand, Ketan Shroff, spokesman of India Bullion & Jewellers Association told Bloomberg. He further said, “After that jewelers might have to go on a holiday as no cash sales will happen.”

C Vinod Hayagriv, Managing Director of Bengaluru-based heritage jeweller C Krishniah Chetty & Sons explains Forbes that nearly 85 per cent of the overall cash tractions in the jewellery sector are made with “bonafide” cash. “Only 15 percent of the overall cash tractions are made through unaccounted for cash [black money]. And this what the government is cracking down on,” adds Hayagriv, who is also the chairman of the legal committee of the All India Gems & Jewellery Trade Federation (GJF). Hayagriv estimates that over the next six months, jewellers could see 15 per cent decline in sales on account of black money cash tractions coming under the government scanner.

Demonetisation Challenges

The government should have circulated the new notes before discontinuing the old ones as it will be tough for jewelers in the coming months until liquidity improves, said Shroff. India’s mainly unorganized jewellery market undertakes transactions mostly in cash as rural India, which makes up nearly 60 per cent of the total demand has limited access to the banking system and rarely uses credit and debit cards for purchases. A slowdown is predicted over next one month. “Gems and jewellery sector are made through credit and debit card. The sector will be adversely affected as there are high-value transactions in the gold market driven by high-value currency notes,” said Patel, GJTCI President.

Retailers are also going to face problems, say industry players. “Traders, especially small ones, will have to face lot problems in day-to-day dealings. Their turnover is expected to take a hit as there will be cash crunch over next few weeks,” said Jayendra Tanna, president, Gujarat State Traders Federation to Times of India. Diamond industry analyst, Anirudh Lidbide, said that the decision of the Union government will lead to collapse of the diamond industry in Surat and Mumbai. “This is the biggest setback for the diamond industry as the sector is heavily dependent on cash transactions.”

Jewelsify founder Hardik Kapoor states that demonetization should have been implemented in a manner where small traders and Indian SME’ face less problem as already SME’s face many problems. “Initially it will inconvenience for small traders and businessmen in the country, where the reach of the modern banking system is still limited. In Ecommerce Industry- COD was just a mode of transaction with Credit/ Debit cards ,digital wallets, bank transfer or cheque payment, UPI there are plenty of modes to transact online and offline. We support each and every step which is for the benefit for the economy even if the benefit will come in the long run.”

Benefits in long-run

Saurabh Gadgil, Chairman and Managing Director, PNG Jewellers and Director, India Bullion and Jewellers Association says, “Government of India’s fight against black money and corruption began with income declaration scheme in Phase 1. The detention 500 and 1000 denomination notes is sequel to same, PNG Jewellers is an organized retailer and we support this relentless fight against corruption. Prime Minister Narendra Modi’s vision to run an economy on plastic money is taking the right course.”

Kapoor adds, “Demonetisation is a bold step which will be positive for the economy in the long run.” The decision to discourage cash transactions will prop up gold demand, which was estimated to hit a seven-year low to remain in the range of 650-750 tons in 2016, according to the World Gold Council. The lower projection came after a 28 per cent crash in demand in the quarter through September from a year earlier to 194.8 tons. However, the London-based miners’ body on November 8 predicted a rebound in demand in 2017 and that the rise in consumption since Dhanetras points at a revival. In such a situation, the government’s move will only help the precious metal further.

“More and more people will opt for gold as the internal hard currency and invest ideally 15 per cent of their wealth. We wholeheartedly welcome the bold move by the Prime Minister. The genuine customers will continue to buy gold,” M.P. Ahmed, General Secretary of KJF told Hindu Businessline. He says that this is the right decision to go towards cashless dealings and we have several examples worldwide like Denmark. “If we curb black money, corporate will grow and people will get more salaries and the government will find more money to invest in crucial segments.”

The gems and jewellery industry has accepted the change happily, comprehending the fact that there will be conditions of uneven pricing, uncertainties and ambiguity in the market for a couple of months. “Like any shift in paradigm this will also take its time to settle down and India and its economy will emerge stronger than ever,” explains Gadgil.