A glittering love affair!

Indians know and love their gold, always have, always will. The Mahajan padas, the sixteen kingdoms of ancient India from the 6th to 4th centuries BCE, used to trade in minted punch-marked silver coins in 600 BC and India was one of the first countries in the world to transition from barter system to a money-based trade system, along with the Greeks. During 1-1000 AD, India was the world’s largest economy and trade was conducted using gold coins and bars. However, India’s love affair with gold has chiefly centred around jewellery, which is interwoven into the very fabric of its society. Whether it is Raksha Bandhan in north India or Onam in the south, or Akshay Tritiya and Diwali all over the country, people buy gold to mark new beginnings, births, festivals, and weddings. In fact, the World Gold Council estimates that more than 50% of Indian demand for gold is wedding related. Even today, India’s gold stock almost equals the market cap of Apple, the world’s largest company in value terms.

Deep-rooted: India’s obsession with the yellow metal!

As per the World Gold Council, Indian households own 23,000 -24,000 tonnes of gold (valued at >US$ 800bn), which is almost equivalent to the market capitalisation of Apple, the world’s largest company in terms of market cap. Additionally, Indian temples own around 3,000-4,000 tonnes of gold, which is offered to the temple deities by devotees. India consumes 700-800 tonnes of gold annually, with purchases driven by tradition, festivals, and other important family and social occasions. In some communities in India, gold is even handed out on someone’s death! The Indian obsession with gold remains never-ending, despite more than a 7x increase in gold price between 2000 and 2017. This is because gold is deeply rooted in India’s culture. Wedding jewellery demand (constituting more than 50% of jewellery demand) remains firm. Buying gold jewellery for an Indian bride is based on the concept of streedhan – loosely translated as the property that a woman should receive at the time of her marriage, in the form of ‘bride security’; technically, it is hers to keep.

Higher ownership in rural India, which tends to rise with income levels Rural India (where 70% of India’s population resides) invests its savings in gold/ jewellery due to lack of access to banking facilities and the yellow metal’s high liquidity. Good harvest along with the wealth effect (increasing land and gold prices) drives rural demand, whereas improved economic sentiment (better job opportunities), an increasing middle-class, and urbanisation drive urban demand.

This kind of consumer behaviour is striking and speaks volumes about India’s culture, not only in terms of the importance of gold but also in terms of the importance of these cultural obligations trumping personal desires. It is amazing that at such a young age, this young man, instead of spending on activities that bring him pleasure, has started saving for purchasing jewellery for his sister. In south India in particular, there is a greater inclination towards gold and this region constitutes 40% of India’s total gold demand.

An inexorable shift towards organised

Despite its enormous potential (Rs 3,000bn annual jewellery sales), the Indian gold jewellery retail industry continues to remain highly fragmented. Small unorganised jewellers still command a lion’s share of the market at 70%, but they have lost considerable share to organised players. Now, the market has three kinds of participants – unorganised, organised regional players, and national players. Regional and national players have been able to increase their market share to 30% in 2015 from just 5% in 2000 based on network expansion, differentiated designs, and providing customers with the best-in-class hallmarked jewellery thereby garnering customers’ trust.

Incrementally, the government is trying hard to ensure that more sectors join the formal economy via GST implementation, which ensures an audit-trail of all transactions. Out of India’s 500mn workforce, 90% is deployed in the unorganised sector and is deprived of social security benefits and minimum wages. In order to encourage formalisation, the government is planning to make a 12% contribution towards employees’ provident funds for the next three years for all new jobs across sectors. Retail (US$ 600bn) and jewellery (US$ 50bn) have the maximum growth potential, given their size and higher share of unorganised players.

All industries are moving towards formalisation, jewellery is no exception

Stock markets have been most bullish about the formalisation theme – and sectors such as brick and mortar retail, jewellery, home-building material, and consumer durables/appliances hold the maximum potential for formalisation. unorganised jewellers are concerned. When hallmarking becomes compulsory, it will act as even more of a key catalyst for the momentum accelerating to the organised sector, because the unorganised sector’s advantage of under-karating will disappear, which in turn will force them to increase making charges.

Troika pushing customers to organised players, led by hallmarking

Organised jewellers have a long run ahead, as they steadily and rapidly gain market share from unorganised players. The troika – compulsory hallmarking, increased regulations (GST implementation), and structural issues are likely to accelerate this shift in coming years. Structural issues include low-cost gold on a lease not being available to unorganised players, their moneylending businesses (at times almost half of their profit comes from this) being under pressure, and their next generation’s disinterest in running a small business. Compulsory hallmarking will be another turning point. There is already a trust deficit as far as competition from gold-loan NBFCs/fin-tech companies in money lending, hallmarking will the last nail in the coffin that will make sure business profitability goes for a toss.

Can organised players become dominant by 2030?

The World Gold Council expects the share of organised players to increase to 40% in 2020 from 30% in 2015 due to a combination of factors. It is likely that after 10 more years, organised players command a dominant market share due to the limited ability of unorganised players to match their might and scale.