MUMBAI – In the world’s largest gold-consuming country after China, demand has just fallen off a cliff.

Saurabh Gadgil, a sixth-generation jeweler, says it’s the worst year in India since he took charge of the family business in 1999. The 39-year old chairperson of PN Gadgil Jewellers, which has stores in the country, Dubai and the US, has offered discounts and freebies to lure customers. “There’s not much you can do as the whole industry is suffering,” he said by phone from the city of Pune.

A slump in prices has given jewelers a glimmer of hope before the Hindu festival of Diwali this weekend and Dhanteras on Oct. 28, the most auspicious day in the year to buy gold. But consumption is still set to shrink to 650 metric tons in 2016, the smallest in seven years, according to a Bloomberg survey of five jewelers and traders. Indians bought 864 tons last year, a quarter of global demand, and a record 1 006 tons in 2010, World Gold Council data show.

“In my 33 years in the market, physical demand has never been this dead,” Marwan Shakarchi, chairperson of MKS, a Geneva-based refiner and trader, told Bloomberg in Singapore on Oct. 16. “It’s a sign the government is serious about cracking down on black money,” he said, referring to a campaign by Prime Minister Narendra Modi to curb undisclosed income.

While global prices have tumbled 8% from the highest in more than two years in July to about $1 265 .oz on Tuesday, they are still up almost 20% this year as central banks extend bond-buying and keep interest rates at low or negative levels in an effort to stimulate growth. Investors have boosted holdings in bullion-backed exchange-traded funds by 40% this year to the largest in three years.

TAX WOES
The story is different in India where a litany of events have hurt demand, from a price surge in the first half of the year and a jewelers’ strike in March and April, to weak rural purchases because of poor monsoon rains and the government clampdown on undisclosed income. A goods and services tax scheduled to start on April 1 may hurt consumption further.

Black money, a colloquial term for income that has illegally escaped taxes, is a hot political issue, with Ambit Capital estimating the black economy at 30-trillion rupees ($450-billion). Modi has tried everything from threatening advertisements to talks with corporate executives to make people declare secret funds in a country where only a small%age file tax returns.

About 100 tons of demand were lost in the first half partly because jewelers stopped work to protest an excise tax on jewelry made and sold in the country, according to the Gold Council. “The tax has been a big problem for us,” said Narendra Bhandari, a jewelry wholesaler in Mumbai. “About 50% of the workers left for their hometowns after the protests started and shops were shut for couple of months across the country. Many have still not come back.”

ZAVERI BAZAAR
The World Gold Council estimated in August that consumption would be 750 to 850 tons this year. In the first half, a confluence of factors hurt buying, John Mulligan, director of member and investor relations at the council, said in Singapore last week. “But there may well be pent-up demand, with Diwali and the wedding season in the second half pushing consumption higher,” he said.

More people have visited the Zaveri Bazaar in Mumbai, the country’s biggest bullion market, in the past week to buy gold for Diwali, Dhanteras and the weddings that follow, where it’s part of the bridal trousseau or gifted as jewelry. Good rains this year also offer some hope for jewelers as rising incomes boost rural purchases, which make up 60% of consumption.

Seasonal demand is picking up, but it will trail last year, Dick Poon, general manager at Heraeus Metals Hong Kong , said by e-mail, adding that while the discount in India has narrowed to $8 in the runup to the festivals from about $30 previously, “demand in India is not that great.”