Congested jewellery shops may keep people away from buying gold, silver even after lockdown ends

It is unfortunate that the impact of the current lockdown on the gold jewelry industry is extremely stressful. In fact, once the lockdown is lifted this is one industry that will find getting back to normalcy tougher than other sectors. Most jewellery markets in India are located in the awfully congested spaces of the cities. Be it Zaveri Bazaar in Mumbai, Manek Chowk in Ahmedabad or Chandni Chowk in Delhi. Thus, implementing social distancing, or adequate safety measures for micro and small enterprises is going to be extremely challenging.

Since gold prices have reached an all-time high there will be a much higher selling demand from consumers. They would want to mint the opportunity in the present uncertain times. This is already trending in developed countries like Germany. However, Indian jewellers may not be able to buy back their sold jewellery at the committed price due to liquidity crunch at their end since the supply chain has been stuck for weeks.

Even the informal market, which was completely shut since cash transactions were impossible, will be skewed towards selling pressure from retail customers. Workers and karigars running their own micro-enterprises (manufacturing by using crude methods) would want to get back to work, but a lot of them had migrated to their hometowns when the lockdown was first announced in Mumbai. For jewelers whose retail customers bought under monthly installment schemes where prices were fixed, the customers may still want to continue but still may be able to cancel at higher cancellation fees and book profits.

However, in the case of schemes where the prices are not fixed, customers who request the jewelers to cancel the orders will lead to more disputes since prices have risen. Despite the fact that digital gold and gold ETFs tried to operate as technology-based financial services products for retail customers, they had their own challenges since at the end of the day physical gold needs to be deposited in vaults. In the absence of logistics companies operating, this became next to impossible.

Even if there were existing stocks, there are limitations on transactions at the authorized participants (market makers) level. Even for the commodity futures exchanges, they had to delay delivery cycles. However, at least the price discovery and hedging of gold stocks were made possible since they are operational. The gold industry would be really looking forward to bringing about a lot of changes – be it more organized manufacturing units outside the city limits, more use of technology for the back office, hedging and order taking, devising a more comprehensive gold jewelry schemes for retail customers and so forth.

The industry will really need government support because of the sheer employment it generates. However, one change that the government should bring about is more liberty in the Gold Monetization Scheme (GMS). At record prices, if retail customers are given incentives, there will be a large amount of domestic gold which will get accumulated, bringing down our dependency on imported gold.

These incentives should include a no-questions-asked limit of 200-300 grams of gold deposit per woman, a fixed interest rate on the lines of gold sovereign bonds (even if it means subvention from the government’s end) and ease of deposit through the jewelers’ network. Instead of focusing on exploring more gold mines or incentivizing the import of Dore gold, India would be better off substituting gold imports through retail incentives. After all, over 50% of the net import duty foregone by the government of India because of lower import duty on dore gold is benefitted by one single private limited company where the majority shareholder is a foreigner. The cost to the exchequer is way higher than the benefits.

Courtesy:Financial Express