A worker displays rings for a photograph in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

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.

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.

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