Indian consumers' voracious appetite for gold jewelry appears to have eased this festive season as high gold prices and the sluggish economy dampen demand.
Jewelry stores across the country typically see a surge in sales in the days leading up to the widely celebrated Hindu festival of Diwali, which falls on November 3. This year, however, jewelers aren't enjoying the buying frenzy they're accustomed to.
"It's been very, very slow. Sales are down 50 percent compared to last year. There's no demand because prices have soared so much, the economy is slow and inflation is high. This Diwali is a flop," said Sunil Tejnani, co-owner of Tikamdas Hiranand, a family-run jeweler located in Mumbai's Zaveri Bazar – a major jewelry market in the city.
Gold prices in the country have risen swiftly in the recent months from around 25,000 rupees per 10 grams in late-June to 30,000 rupees currently, driven by depreciation in the rupee and a recovery in global prices.
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Ashok Minawala, director at All India Gems and Jewellery Trade Federation explained that many consumers rushed to buy gold jewelry when prices fell earlier this year, which has lessened demand during the festive season.
"Consumers feel that the prices aren't fair. They don't want to pay 20 percent more for a product that was available for a lesser price just a few months ago. The market needs to stabilize," he added.
Siddharth Sacheti, owner of Jaipur Gems – a jewelry store that is located in several locations across the country – added that the economic slowdown has also caused customers to scale back on discretionary spending.
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India's unfavorable mix of slowing economic growth and high inflation has been a drag on consumer confidence. Nielsen's index of Indian consumer confidence, for example, dropped six points to 112 in the September quarter from the preceding three months. Consumer confidence levels above and below a baseline of 100 indicate degrees of optimism and pessimism.
"Consumers don't want to buy anything that sounds frivolous. Everyone's thinking about how the economy and elections will pan out," he said.
"This year, we've noticed there's been a sharp fall in the number of walk-in customers into our stores," he added.
In addition to a pullback by consumers, jewelers also face another issue: a shortage of gold supplies due to government curbs on imports, which is also pushing up gold premiums.
"There's a shortage of gold at moment, so there's a premium of $100 an ounce over the London Price. It's very high, it shouldn't be more than $10," said Harmesh Arora, chief executive director of Bombay Bullion Association on Thursday.
"With such premiums, it's harder for jewelers to sell to consumers," added Minawala.
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Since 2012, the Indian government has been actively targeting gold imports in order to reduce its current account deficit. Gold is the biggest non-essential item in India's import bill.
In August, for example, it raised the import duty on bullion for the third time this year to a record 10 percent from 8 percent previously.
—By CNBC's Ansuya Harjani; Follow her on Twitter: @Ansuya_H
