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India Clampdown on Black Cash Prompts Gold Rush

Long-term outlook bleak for domestic gold and diamond jewelry market

Nov 10, 2016 11:35 AM   By Rapaport News
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RAPAPORT... Gold and jewelry sales in India surged this week after the government imposed a surprise ban on 500- and 1,000-denomination rupee notes, forcing the country’s unaccounted money to be channeled into hard assets.

“People are shocked and trying to figure out what to do with their money,” said Jatin Gajera, a manager at Laxmi Diamond, a diamond and jewelry manufacturer. “They’re paying high premiums because they need to convert their cash in a short period.”

While the official gold price remained relatively stable at about INR 31,000 per 10 grams in the two days since the November 8 announcement, the “unofficial” rate climbed to between INR 40,000 and INR 60,000 per 10 grams, traders told Rapaport News.

Indians have until December 30 to deposit the old currency notes in their bank accounts; but if they want cash they can only exchange new notes up to the value of INR 4,000 ($60). There’s also a limit on the amount of new notes individuals can withdraw, set at INR 10,000 ($150) per day and INR 20,000 ($300) per week.

Vulnerable Jewelry Trade

The Indian government took the unprecedented step in an attempt to curb financing of terrorism and other subversive activity such as espionage, smuggling of arms, drugs and other contrabands into the country, the Ministry of Finance explained in a press release.

“Use of high denomination notes for storage of unaccounted wealth has been evident from cash recoveries made by law enforcement agencies,” the ministry said. “High denomination notes are known to facilitate generation of black money.”

That cash often ends up in the gold and jewelry trade as well as the real-estate industry, explained a high-ranking official in the diamond industry who requested anonymity. In the medium term, he said, the move will probably lead to a decline in jewelry sales.

The directive follows other measures implemented by government aimed at curbing the use of black money in the retail sector. In December 2015, it cut the threshold above which a consumer must show their Permanent Account Number (PAN) to make a cash purchase from INR 200,000 ($3,000) to INR 500,000 ($5,000). A 1 percent excise duty on jewelry sales, put into effect earlier this year, was also seen as a clamp down on the jewelry trade.

Long Term Impact Expected

The new currency rules will have a notable negative effect on smaller, independent jewelers across the country, who tend to deal more in cash, explained Jignesh Mehta, managing director of Divine Solitaire, a diamond jewelry brand. “They’re generally the ones willing to take the risk of engaging in undisclosed business,” he said.

Similarly, the move will likely affect smaller operators in the diamond trade as they deal in cash and supply goods to local jewelers, said Gajera. Supply to the domestic market represents a very small portion of sales among the large diamond manufacturers as most of their polished production is earmarked for exports, he added.

From the point of view of the diamond industry, the high-ranking industry official said he expects the impact will be more evident in demand trends rather than drying up liquidity.

As jewelry sales are projected to slow in the medium term, demand for smaller, low-color and some categories of better-quality diamonds popular in the local market is expected to weaken, he said. That may also impact global trading since India is the third-largest consumer market for diamond jewelry, the official added.

For now, local jewelers are enjoying the windfall, as the policy move coincides with the start of the wedding season, a popular time to buy gold and diamond jewelry. “We had a good Diwali season and now sales this week have been unprecedented,” Mehta said.

While the wedding season continues through to February, most dealers who spoke with Rapaport News acknowledged the growth spurt will likely be temporary as the government directive becomes embedded into the system and the level of unaccounted for money declines.

“The decision will have an adverse effect in the short-to-medium term,” Gajera said. “Things will slow and it will take some time for a decent quantity of the new currency to enter the market.”


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Tags: Black market, Gold jewelry, India, INR, Rapaport News, retail, Rupee
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