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MOSL: THE BIG LEAP – VOL-2.2-Jewelry - Shift likely to remain gradual-Pace can intensify with stringent cash transaction norms

​THE BIG LEAP – VOL-2.2: Jewelry - Shift likely to remain gradual; Pace can intensify with stringent cash transaction norms

• India is on a structural path towards a formal economy, (please refer to our inaugural issue of “The Big Leap” series) prodded by a string of government initiatives such as demonetization, GST, and Aadhar-linking. While these are steps in the right direction, we believe the shift will be prompt for some sectors, gradual for others, and might remain challenging for a few.
  
• In this edition, we focus on the ~INR3t Indian Jewelry industry, where we believe the shift will be gradual. A fragmented industry, it is dominated by the unorganized segment (estimated at INR1.2t; 70% of domestic jewelry sales), and changes in administrative procedures under the GST regime using technology are unlikely to accelerate the shift towards organized players.
  
• Yet, a material reduction in the threshold for cash purchases without identity proof could be the catalyst, and would benefit large organized players like Titan, P C Jewellers, Malabar Gold & Diamonds, Kalyan Jewellers, and Joyalukkas among others.
  

Significant opportunity to formalize the sector

Gems and jewelry have historically been a preferred mode of accumulating illicit wealth in India. Given the high faith in family jewelers (usually unorganized) that have been offering competitive pricing and their expertise in traditional jewelry over generations, the sector has come to be dominated by the unorganized trade, estimated at ~INR1.2t (70% of overall domestic industry revenue).

However, with rising urbanization, change in government policies & consumer preferences, and emergence of strong brands, there has been a steady increase in the market share of organized players from 10% in 2000 to 30% in 2016.

Administrative policy changes under GST unlikely to formalize jewelry trade

The Indian government is taking initiatives to shift trade in favor of the formal economy. GST, with its new administrative procedures and technology, is yet another step to formalize the trade. This presents an opportunity to investors to take advantage by investing in sectors likely to benefit.

However, we believe that with a small B2C supply chain, the Jewelry sector can continue to operate end-to-end in the parallel economy. Changes in the administrative procedures and technology platform are unlikely to alter the trajectory of shift of trade towards the formal economy.