India’s diamond sector faces multifaceted challenges

MUMBAI: India’s diamond sector has witnessed a dramatic decline in both imports and exports over the past three years, resulting in defaults, factory closures, and significant job losses, according to the Global Trade Research Initiative (GTRI)

The situation has been exacerbated by a substantial accumulation of unprocessed rough diamonds and increased competition from lab-grown alternatives.

GTRI’s analysis highlights a staggering 24.5 per cent drop in rough diamond imports, from $18.5 billion in 2021-22 to $14 billion in 2023-24, reflecting weakened global demand and diminished processing orders in India.

Concurrently, the exports of cut and polished diamonds plummeted by 34.6 per cent during the same period, underscoring the sector’s tumultuous landscape. The escalation of unsold diamond inventory, which surged from 35 per cent to 45.6 per cent, serves as a stark indicator of a faltering market. Notably, the widening gap between net rough diamond imports and net cut and polished diamond exports, which escalated from $1.6 billion in FY 2022 to $4.4 billion in FY 2024, signifies an alarming inventory buildup and insufficient export orders.

Operational issues persist

The multifaceted challenges faced by the diamond industry stem from both external and internal factors. Global economic uncertainties, inflation, and geopolitical tensions have dampened consumer spending on luxury goods, including diamonds, particularly in key markets such as the United States, China, and Europe.

Additionally, the ongoing Russia-Ukraine conflict has disrupted global supply chains and complicated trade dynamics due to sanctions on Russia, a principal producer of rough diamonds.

Moreover, the growing preference for lab-grown diamonds, characterised as a more ethical and affordable alternative, has further eroded the demand for natural diamonds.

Internally, operational issues persist. Many polishing units, burdened by large inventories of unsold polished diamonds, are reluctant to import fresh stocks, stymying production capabilities.

Rising costs related to labour, energy, and materials, coupled with reduced profit margins, has rendered many businesses unsustainable. Furthermore, the tightening credit conditions and diminished lending from financial institutions have exacerbated these challenges, stifling the sector’s ability to procure essential raw materials.

Workers face emotional strain

The human toll of this crisis is stark, with over 60 reported suicides among those employed in Gujarat’s diamond sector, pointing to the severe financial and emotional strain faced by workers. Such tragedies underscore the urgent need for immediate intervention to revitalize the diamond industry and secure the livelihoods of countless individuals reliant on this sector.

Srivastava, said that a growing proportion of cut and polished diamonds exported from India are being returned due to various issues, including quality concerns, overstocking by buyers, mismatches in specifications, and erratic price fluctuations.

“These returns impose substantial costs and administrative burdens on exporters, exacerbated by complex customs procedures.”

Dubai’s share improves

Despite Dubai’s lack of diamond production, its share of India’s rough diamond imports has experienced a dramatic increase. The statistics reveal that Dubai’s contribution surged from 36.3 per cent in FY 2020 to an impressive 64.5 per cent in April-June 2024, while Belgium’s share plunged from 37.9 per cent to 17.6 per cent over the same period.

The trend can be attributed primarily to India’s high corporate tax regime on foreign suppliers of rough diamonds. As a result, these suppliers are increasingly compelled to reroute their exports through Dubai, which has rendered India’s Special Notified Zones (SNZs) in Mumbai and Surat largely ineffective.

To navigate these challenges and bolster the diamond export sector, GTRI has proposed several strategic measures.

Key recommendations include extending export credit terms, exempting foreign rough diamond sellers from corporate tax in India, and regulating the increasingly prominent lab-grown diamond industry. Additionally, the GTRI advocates a reconsideration of the zero-tariff import of cut and polished diamonds from Dubai, facilitated by the India-UAE trade pact.

Given India’s robust foreign exchange reserves, GTRI suggests that the Reserve Bank of India (RBI) could extend the export credit period for cut and polished diamond exporters from six to twelve months. This adjustment would align with the demands of buyers for longer credit terms, supporting India’s position in a competitive global market.

The Indian diamond industry consists of over 7,000 companies engaged in diverse activities, primarily concentrated in Surat, Gujarat, and Mumbai, Maharashtra. The sector consists predominantly of small and medium-sized enterprises (SMEs), many of which are family-owned businesses.

Notably, this industry provides direct employment to approximately 1.3 million individuals, with Surat alone accounting for about 800,000 workers, making it the world’s largest hub for diamond cutting and polishing.