Given that gold demand is income-elastic, future growth in gold jewellery business is likely to be driven by increased exports to US and other markets, and domestic consumption.

Although exports of gold jewellery have increased from Rs 5,220 crore (Rs 52.20 billion) during FY 2001 to Rs 23,516 crore (Rs 235.16 billion) during FY 2007 (source: Icra industry monitor), the export business has been constrained by an inability to compete in global markets on basis of price and superior design capabilities.

However, in recent years, the Indian industry and the World Gold Council has introduced international jewellery designing competitions among the Indian artisans to create greater awareness about Indian artisans in the global market and also to expose Indian artisans to global design developments.

There have also been initiatives to set up a number of design centres, targeted at training Indian jewellers in international manufacturing and designing skills.

Such initiatives are likely to further enhance exports of Indian gold jewellery.

According to recent statistics of the Gems & Jewellery Export Promotion Council, India's exports of gems and jewellery aggregated to Rs 18,399 crore (Rs 183.99 billion) during the first quarter of FY 2008 (April-June 2007), representing an increase of 12.4 per cent over the same period of FY2007.

Comparatively, exports increased 5.1 per cent to Rs 77,180 crore (Rs 771.80 billion) in FY2007.

The healthy growth in exports during first quarter of FY2008 was mainly because of strong growth in the two major items cut and polished diamonds and gold jewellery.

India's imports of GJ increased 9.8 per cent (yoy) during Q1 FY2008 to Rs 16,499 crore (Rs 164.99 billion).

Comparatively, imports declined 5.8 per cent during FY2007 to Rs 589.42 billion mainly because of slow growth in exports and lower domestic demand of gold jewellery.

In June 2007, due to concerns about dollar weakness and inflation, investment demand for gold increased as a hedge against a possible depreciation of the dollar.

Prices were also supported by subdued growth in global mine production and a reduction in official sector sales.

According to Icra, the factors supporting increasing demand for gold remain largely in place that include high US current account deficits, and a weak US dollar, which encourages investment in gold as a hedge.

Gold prices are expected to remain at high levels in 2007 and 2008. Average world gold prices are expected to increase 11-12 per cent in 2007 to $670/oz, and to average around $680-690/oz.

Higher operating margins during FY2006 resulted in ROCE improving to 9.1 per cent in FY2006.

Because of the healthy growth in domestic sales and increase in prices, operating income increased 16.3 per cent during Q1FY2008.

However, lower import costs because of rupee appreciation, stock liquidation and profit on old stock resulted in higher operating margins.

Higher operating profits and higher other income resulted in a 56.6 per cent year on year increase in net profits.
On a quaterly basis, operating margins improved from 5.4 per cent in Q4FY2007 to 6.6 per cent in Q1FY2008 because of rupee appreciation.

The Indian GJ industry is already reporting increased growth in the larger-size segment.

Export data from the GJEPC also report a gradual shift in Indian exports to higher value segments, reflected in higher per cent realisations.

According to Icra, the diamond industry is optimistic that continued healthy growth in world GDP and increased marketing expenditure could result in increased demand growth over the medium term.

Looking forward, since India already enjoys domination in the world CPD market in general, and for smaller-sized diamonds in particular, the scope for significant increase in market share and growth in the traditional small-size diamond exports is limited.

Industry leaders are now seeking further growth through processing of larger size stones, and manufacture of diamond jewellery.

Indian industry can now increasingly process the full range of sizes and qualities of stones utilising not only a cheap and abundant workforce, but also advanced technologies.

Future growth is likely to be largely driven by the cutting and polishing of medium and large stones, currently dominated by Belgium and Israel , with consequently higher unit realisations.

In India, diamonds are an established consumer product, but the potential size of the market is only just being recognised, especially in comparison with annual gold demand.

The long-term outlook for the Indian diamond and jewellery industry continues to be positive.

India's competetive advantage is likely to depend on its skilled labour combined with a ready adoption of leading-edge technology and an increasing degree of vertical integration.