A $1.8 billion fraud shook the entire nation in the last few days. Fear, apprehension and worry- the most instinctive reaction of jewelry merchants in India, to this latest event in the jewelry industry. But is this a premonition of a downturn in the industry? Or will this be a lesson learnt for the jewelry magnates to be more cautious and induce stringent policies? One wonders. But only an assessment can be made of the current situation and weigh it against the market predictions.
So, what is the plausible outcome of this game-changing incident? Before we jump onto the after-effects, let us reiterate what we already know.
The market before the scam
The jewelry industry has been growing at light speed in India. With gem and jewelry industry contributing to 7% of the country’s GDP and 15.6% of the merchandise export, any set-back can cause a butterfly effect on the economy. Because, India grew to be the hub of gold and diamond jewelry business due to its low-cost resources and high-skilled labor. By September 2017, the FDI in gold and diamond jewelry space touched $1045.58 million.
In such a prospective market scenario as this, it is not unnatural for jewelry traders and exporters to fear a ‘ripple effect’ on the merchants. They believe a scam as surmounting as such could make the lenders more cautious and impact the credit flow.
The business of jewelry design, manufacture and export is a highly trust-based industry. And based entirely on instinct and faith, merchants provide an extended credit period of 30-180 days and trade references.
As CEO of Arjav Diamonds, opined in a recent interview,
“The sad part is this will impact trust in the diamond market. There will be tightened norms, and dealing will get difficult not only with the financial markets but also even within the diamond market,”
That is undoubtedly an instinctive thought from an industry peer. But the ones regulating the industry feel otherwise. The GJEPC (Gem and Jewelry Export Promotion Council), however believes that in an industry space spanning countries and involving thousands of merchants, if majority abide by the law and such a situation still occurs, then it is probably and possibly because traders and merchants ‘do not want to abide by the norms’.
This is exactly how Pramod Aggarwal, Chairman, GJEPC feels as well.
"When thousands of exporters conduct business lawfully, adhering to all norms and practices (that have been) prescribed very diligently, incidents of this kind can only take place due to non-adherence of procedures and norms laid down. We strongly believe that this incident will not have any contagion effect on the gems and jewellery export industry”, he said in a recent media interview.
The Council also strongly believes that this upheaval will not have any direct effect on the gem and jewelry export industry. However, they do fear a major shift in the psychological aspect of the trade. This could also affect the credit behavior of traders.
“Some ripple effects are bound to happen and it (the fraud) will have some psychological impact on the minds of loan advancers. This could impact credit flow to the industry or cause delays in extending advances”, commented Prakash Chandra Pincha, regional chairman of GJEPC (Eastern Zone).
The onus, according to council members, now lies on the financial institutions to investigate deeper before clearing any advances. Only if those institutions tighten policies, can they prevent from recurrence of such events in the near future.
All said and done, this entire incident has definitely caused unrest in the industry. All financial institutions, including insurance companies, will be cautious and hold-back before extending any services to any jewelry merchant. Investors might consider this to be a risky industry space. Buyers might rethink deals. However, if industry experts be hopeful as they are, this incident could just be a bump on the road to growth for this fast-moving industry.
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