CRISIL Ratings has projected that gold jewellery volumes in India could slip to a decadal low in the current financial year, primarily due to the recent increase in import duties on gold. The rating agency, however, believes that the credit profiles of jewellery retailers are likely to remain stable despite the volume decline.
Impact of Duty Hike
The government raised the import duty on gold to 15% from 10.75% in July, a move aimed at curbing the widening current account deficit. CRISIL noted that this sharp hike has dampened consumer demand, especially in the rural and semi-urban markets, which are more price-sensitive. As a result, overall jewellery volumes are expected to drop by 8-10% in fiscal 2024, marking the lowest level in a decade.
Demand Dynamics
High gold prices, which have already been trading near record levels, coupled with the duty increase, have made gold purchases more expensive for consumers. The wedding season demand, which typically boosts sales, has also been affected. However, CRISIL highlighted that urban demand is relatively resilient due to higher disposable incomes and a preference for lighter, more affordable jewellery designs.
Credit Profile Stability
Despite the volume slump, CRISIL expects the credit profiles of organised jewellery retailers to remain stable. This is attributed to their strong balance sheets, efficient inventory management, and ability to pass on part of the cost increase to consumers. The organised sector, which accounts for about 35% of the market, has been gaining market share from the unorganised segment, further supporting its credit quality.
Outlook
CRISIL stated that the jewellery industry's operating margins are likely to be under pressure in the near term, but the impact on cash flows will be limited. The agency also noted that any further duty hikes could exacerbate the volume decline, but the overall financial health of rated entities is expected to remain adequate. The recovery in volumes is contingent on a correction in gold prices or a reduction in duties, which seems unlikely in the near term.
