IDEX Online Research: India's Strong Economic Growth Good for Diamantaires

India, potentially the world’s biggest market for diamonds and jewelry on the near term horizon, posted strong economic growth during 2005, a trend that is forecasted to continue into 2006. These trends are good, both for diamantaires in India who produce diamond jewelry as well as for India’s jewelry retailers who sell to local customers. 

For its fourth quarter ended December, India’s economic growth, as measured by the Gross Domestic Product (GDP), grew by 7.6 percent over the same period last year. For the full year, India’s economy grew by an estimated 8 percent. The graph below illustrates India’s economic growth by quarter for the past two years. 

By contrast, the economy of the U.S. grew by about 3.1 percent in 2005 while the Euro-Zone economy posted a modest 1.7 percent growth. Among major developing nations, only China posted economic growth greater than India: +9.9 percent. 

By sector, India’s economic growth was fueled by the following factors:

• Services – Financial, insurance, and business services grew by a very strong 9.1 percent (annual rate) in the fourth quarter of 2005, though this was a slower pace than the 9.8 percent growth that this sector posted in the third quarter of 2005. Just over half of India’s GDP is represented by the “services” sector of the economy. 
• Manufacturing – India’s manufacturing sector, which represents about one-fifth of GDP, rose at an 8.4 percent annualized pace in the fourth quarter. 
• Agriculture – Farm output, which represents about a quarter of GDP, generated a 3.4 percent gain, somewhat above the more modest 2.4 percent increase in the third quarter. 

While India’s economy grew at a solid pace in 2005, its expansion slowed very modestly in the fourth quarter, with December the slowest period in the final three months of the year. However, IDEX Online Research does not believe that this is the beginning of a downturn; more likely, it simply represents modest cyclicality in an otherwise strong overall trend. 

India’s booming service sector, fueled by business process outsourcing, continues to support the country’s strong economic growth.

India is a particularly attractive market, especially for the jewelry and diamond industry, for the following reasons:

• Over one billion consumers – India has a population of over 1.1 billion people. While tremendous income gaps still exist between its classes, the aggregate market holds more potential near term than China, which some have touted as the “market of the future.” IDEX Online Research believes India holds more near term potential for diamantaires.
• Huge middle class – India has a true middle class of more than 300 million people. That’s larger than the entire population of the U.S. 
• Hunger for the finer things in life – India has always been a strong gold jewelry market. Unlike communist countries such as China that have disdained trappings of wealth, India’s population has always delighted in “wearing their wealth.” 
• Negative trade balance – India’s trade balance is slightly negative. This means that it is importing more goods than it is exporting, and shows that India’s economy is capable of generating strong demand for goods and services. It also reflects the vitality of the country’s economy. While America has been criticized for its negative trade balance, there is no comparison. In the most recent period, the U.S. trade balance was nearly $800 billion; India’s was a very manageable $37 billion. 

India still has some major obstacles to overcome as it joins the world’s major economies, including the following:

• Poor infrastructure – India’s infrastructure is dismal. For example, roads are poor and land-based communications don’t work. This has severely hampered development of large scale manufacturing facilities.
• Significant government ownership – Restrictions on foreign investment and a high level of government ownership have stifled economic growth. Multi-national companies have been unable to make significant inroads into India.
• Imported energy – India is heavily dependent on imported energy. High oil prices pose a threat to inflation.
• Huge fiscal deficit – India’s social programs are a huge drag on government spending, and they don’t seem to be especially effective.

Outlook

Despite the barriers listed above, IDEX Online Research predicts that India’s economic growth will rise by nearly 7 percent in 2006. This is still a very robust level, even though it is slightly slower than 2005’s growth rate. Structural imbalances continue to be the single factor which will retard India’s growth, both in 2006 and beyond.

IDEX Online Research continues to focus on India as the next major developing market for jewelry and diamonds. Certainly some Asian markets, such as China, have potential longer term, but India is on the cusp of becoming a rich nation. Indian consumers are ready to spend their money on jewelry.