Pearls Imports Fine Print Hint at Capital Flight From India

(Bloomberg) -- Runaway jewelers have become somewhat of a staple of news headlines out of India. But reading the small print of trade numbers may tell a new story -- flight of capital.

A spurt in imports of precious stones and pearls, at a time when gold imports have moderated, has raised the red flag for analysts at Credit Suisse AG, who say it is a “hint” at capital leaving the country.

Shipments of pearls, precious and semi-precious stones in March stood at $3.03 billion, an increase of 17 percent from a month ago, according to commerce ministry data. Gems and jewelry exports contracted by as much during that period, acting as a drag on overall exports that widened India's trade deficit.

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Imports of these stones are “worryingly large now,” particularly given the drop in jewelry exports, analysts Neelkanth Mishra and Prateek Singh wrote in a note dated April 16.

Trade deficit widened $1.7 billion in March with jewelry and stones driving a large part of the increase. The trailing 12-month gap is now $157 billion, up $63 billion from the lows seen in September 2016. The country is the world's second largest user of gold after China and its love for jewelry is well-known. However, this can't be said for pearls and precious stones.

People wanting to hold gold instead of the local currency is a form of capital flight, Mishra wrote in an article in Business Standard newspaper earlier this month. But with large imports of these stones and pearls -- which are generally hard to value objectively -- the angle of money exiting the country can't be ruled out as a factor.

The bottom line? Credit Suisse expects the country's current-account deficit to continue to widen and the rupee's weakness to persist. It prefers companies with dollar-based revenues like metals and software makers, the note said.

To contact the reporter on this story: Nupur Acharya in Mumbai at nacharya7@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Karthikeyan Sundaram, Ravil Shirodkar

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