Gems and jewellery sector: Time to rise & shine
Despite India being the second largest consumer of diamonds in the world, the Indian gems and jewellery industry is facing numerous challenges such as high import duties & mandatory hallmarking. These have prevented the sector from realizing its true potential. This blog explores how this issue can be rectified.
- India is a hub of cut and polished diamonds, with an export value of approximately US$ 564 million in the fiscal year 2020. The sector employed over 4.64 million people in 2018-19.
- India is the second largest consumer of diamonds. However, issues such as high import duties & mandatory hallmarking have remained bottlenecks towards reaching the full potential of the sector. The outbreak of COVID-19 has exacerbated the problems of this sector.
- In order to deal with the ongoing issues in this sector, various steps need to be taken, which this blog seeks to explore.
India has one of the largest markets in the world for the gems and jewellery sector and contributes 29% to the global jewellery consumption. This sector contributes 7% to the Indian economy and is home to more than 40 lakh people. India’s demand for gold reached 690.4 tonnes in 2019. Pre-Covid growth estimates for the sector stood at a market size of US$ 103.06 billion by 2023, with the domestic jewellery market growing at a compound annual growth rate of 5.6% during FY 18-23.
For FY 2021, the overall gross exports of gems & jewellery stood at US$ 25.3 billion, indicating a decline of 28.46% as compared to US$ 35.4 billion for the same period in FY 2020. The overall gross imports of gems & jewellery for FY 2021 stood at US$ 23.2 billion in the month of March 2021, showcasing a growth of 74.08% as compared to US$ 13.3 billion (Rs 9,884.08 crores) for the same period in FY 2020 (GJEPC).
Evidently, India imports a large amount of gold due to high demand in the domestic market (it is the second largest consumer of gold in the world) and lack of adequate gold mines to cope with huge demand in the country. In fiscal year 2020, India imported gold worth Rs 2 trillion. The import value was lower than the 2019’s value of over Rs 2.2 trillion. India currently levies custom duties on gold and silver at 7.5%, which was earlier at 12.5%, and imposes an additional 2.5% cess (a separate tax on the imports for agricultural infrastructure development). High import duties have resulted in smuggling of gold bullions in the country, thereby promoting illegal gold transactions and thriving of the shadow economy.
Another major challenge faced by gems and jewellery industry in India is the mismatch between demand and supply. This is mainly due to India’s inability to keep up with changing jewellery trends. For instance, while in India there is a great demand for temple jewellery and jewellery made out of coloured gemstones (meenakari and kundan work), simple branded jewellery is the choice universally, thereby leaving India behind.
The outbreak of COVID-19 shifted nearly 20% of jewellery exports online in this current financial year. India exported gems and jewellery worth Rs 142,125.56 crores in the first 10 months of the fiscal year 2020, witnessing a decline of 34% year-on-year. The COVID-19 outbreak across the globe has precipitated challenges due to supply chain disruptions as a result of subsequent lockdowns imposed by various governments. In April-June 2020, exports from India declined by almost 70% yoy.
Further, while the market has a huge potential, the maximum potential is far from being attained due to the unorganised nature of the market. Workers form the core of the gems and jewellery market and migration of these workers to hometowns due to various lockdowns in place was a huge blow to the industry, as this impacted the production process. Also, there are no social security nets for these workers, which would disincentivise them from joining back and make the sector unattractive for new potential labour to join.
Lastly, the Government of India on 15 January 2020 made hallmarking necessary for gold jewellery/artifacts (not applicable to silver). This order makes it compulsory for all the jewelers selling gold jewellery and artifacts to register with Bureau of Indian Standards (BIS) and sell hallmarked gold jewellery and artifacts of 14, 18 and 22 carat only with effect from15 January 2021. This has however not been in effect currently due to the ongoing coronavirus crisis across the country. The order however to hallmark all the existing gold jewellery to be sold by June, 2021 remains in place.
According to the All India Gem and Jewellery Domestic Council, only 33% of India’s districts have assaying and hallmarking centres that tests the purity of gold for hallmarking. The industry has asked for this testing infrastructure to be ramped up before hallmarking is made mandatory.
It would be therefore be beneficial if the Government considers extending the deadline for mandatory hallmarking. This would provide stakeholders adequate time and facilities to build ecosystem for the same as Covid-19 has caused a slowdown in the market already.
Though the basics custom duty on gold was reduced to 7.5%, the import duty on gold remains at 12.5%. Additionally, the levying of 2.5% of agriculture infrastructure and development cess has lead to increase in the prices of precious metals as well as gold. This results in plummeting physical demand further leading imports to tumble down to multi-year lows. The total levy on gold currently is at 15.5%, including Goods and Services Tax (GST). The sector would gain in terms of prices and demand in domestic market if the import duties on gold and precious metals are lowered.
Since subsequent lockdowns have been put in various states due to ongoing second wave of COVID-19, the government should also provide for social security schemes for the fringe workers of the sector. This would help to save livelihoods and incentivise them to migrate to workplaces as the situation subsides.