The Indian economy continued to surge ahead in the three months ended September 2006, with a gain of 9.2 percent, one of the highest growth rates in the world. The Indian jewelry market is estimated to be about $10 billion, or about 8 percent of the world market. It is largely driven by demand for gold jewelry, but demand for diamond jewelry is increasing rapidly.

Similar to the second quarter, growth of India’s Gross Domestic Product (GDP) was largely driven by the country’s manufacturing sector, which is becoming increasingly important. Currently, manufacturing accounts for about one-fifth of India’s economy. Manufacturing output is driven by both local demand and very favorable external demand.

The agricultural sector, which accounts for roughly one-third of India’s economy, eased in the third quarter, after posting strong gains in prior quarters this year. Earlier gains were due to favorable monsoon rains. The impact of this weather appears to have faded, and growth is returning to its long term average. As a result, this could temper growth in the near future, especially among India’s rural poor.

The services economy, which accounts for nearly half of India’s total economic output, posted strong growth, though no detailed figures are available yet.

Outlook: Solid, Though Moderating Growth

While the global economy is expected to slow in 2007, India should escape most of the impact. Domestic consumption, government spending, and exports related to its service economy are the drivers of India’s economic growth, and most economists see solid gains in all three of these categories for the foreseeable future. It is possible that growth in India’s manufacturing sector will moderate, though, if global demand for industrial products softens.

Near term, economic growth in India is projected to remain in the 8-9 percent range. The Reserve Bank of India raised one of its key interest rates by a quarter of a percentage points in an effort to rein in growth. Further, some economists are forecasting that more monetary tightening will be necessary in 2007. However, it appears that India will escape most of the global slowdown that is predicted for next year.

Longer term, most economists believe that the inherent growth rate of the Indian economy is around 7-7.5 percent annually, somewhat below the recent growth rate of 9 percent or more. However, this potential slowing of economic growth will have no measurable impact on jewelry consumption. With a middle class group of consumers estimated to be about 300 million people – a group that is growing day-by-day – consumption of luxury goods will accelerate, and jewelers will be the beneficiaries.