What’s Causing Indian Diamond Industry’s Downfall?

Even after being the world’s largest exporter of polished diamonds and employing over a million workers, the Indian diamond sector is currently going through a downward slope at a rapid pace. With both imports and exports declining sharply in the past three years, the surge in export returns has put the sector at a crossroads. The sector has been rocked with defaults, factory closures and widespread job losses. It makes everyone wonder what happened to the once booming sector and is there a way out?

The Indian diamond sector has been grappling with a sharp decline in imports as well as exports. The rough diamond imports marked a 24.5 per cent drop to decline from USD 18.5 billion in the financial year 2022 (FY22) to USD 14 billion in FY24, demonstrating a weaker global market and fewer processing orders.

The export segment registered a bigger dip as the exports of cut and polished diamonds (CPD) fell by a higher margin of 34.6 per cent from USD 24.4 billion in FY22 to USD 13.1 billion in FY24. The net exports of CPD dropped by 45.3 per cent from USD 15.9 to USD 8.7 billion, as per a report by Global Trade Research Initiative (GTRI).

The Widening Gap
As the gap between net rough diamond imports and net CPD exports has widened to USD 4.4 billion in FY24, from USD 1.6 billion in FY22, it has signalled a large inventory build-up and a dip in export orders.

Adding to the troubles, the share of unsold diamonds returned to India increased from 35 per cent to 45.6 per cent during this period, as highlighted by the GTRI report.

In March 2024, a report by Care Ratings, a rating agency, stated that the country’s CPD exports were projected to decrease by 25 to 30 per cent. The decline led to a multi-year low in export earnings as the estimates ranged from USD 15 to 16 billion, as per Care Ratings.

The Global Challenges
The sector is facing the heat from both fronts, external as well internal. The substantial drop in demand from key markets such as the United States and China, which collectively account for over 60 per cent of the country’s diamond export has caused a setback, as per the report by Care Ratings.

“Fluctuations in global diamond prices have caused uncertainty, with buyers hesitant to purchase rough diamonds in anticipation of further price drops. The Russia-Ukraine conflict has also disrupted the global diamond supply chain, with sanctions on Russia, a major rough diamond producer, further complicating trade and slowing down the global diamond trade,” revealed a report by GTRI.

The Internal Troubles
The country has been struggling on the management part as many polishing units have large unsold inventories of polished diamonds, discouraging them from importing fresh diamonds. The issue of quality control has been a constant problem as a significant portion of CPD exported from the country are being returned due to poor quality and mismatch in specifications.

“Rising operational costs, including labour, energy, and materials, along with reduced margins in the global diamond trade, have made it difficult for many polishing units to remain viable, leading to shop closures and layoffs, especially in Surat,” Ajay Srivastava, Co-founder, GTRI highlighted in a report.

Issuing a negative outlook for the CPD industry in March 2024, Care Ratings highlighted that the imbalance between supply and demand had impacted the prices of diamonds. “Prices have seen declines ranging from 5 to 10 per cent for smaller diamonds to as much as 20 to 30 per cent for mid-sized diamonds, impacting the overall export earnings of the industry,” it stated.

The Competition From Lab-grown Diamonds
As lab-grown diamonds are seen as nearly indistinguishable from natural ones, this shift has reduced demand for the natural diamonds that India specialises in cutting and polishing. They have shifted the consumer preference. There have been concerns regarding their regulation and sustainability in the longer term.

“The creation process of lab-grown diamonds replicates natural diamond formation, requiring a substantial amount of electricity, often sourced from the national grid. Over 60 per cent of lab-grown diamonds are mass-produced in China and India, where a significant portion of the grid electricity is derived from coal. The manufacturing involves extremely high temperatures, comparable to 20 per cent of the temperature of the Sun’s surface,” stated a report by the National Diamond Council last year.

The lab-grown diamond sector is facing the heat too as the prices have come down over the past year. There are discussions regarding the regulation of the industry.

“India’s lab-grown diamond industry is facing a 65 per cent drop in prices over the past year, from Rs 60,000 to Rs 20,000 per carat, driven by overproduction, high imports, and weak regulation. The Ministry of Consumer Affairs should introduce guidelines to clearly label and certify lab-grown diamonds in jewellery, and sales invoices should state whether the jewellery includes lab-grown diamonds,” Srivastava added.

Tackling The Challenge
GTRI has listed some of the measures for improvement as far as the sector is concerned. The Reserve Bank of India could extend the export credit period for CPD exporters from 6 to 12 months, as buyers now demand longer credit terms. GTRI has suggested that foreign rough diamond sellers should be exempted from the corporate tax in India.

“To compete with the United Arab Emirates (UAE), India should exempt these foreign firms from corporate tax when selling through special notified zones (SNZs) and treat such sales as regular imports subject to import duties, not corporate tax,” highlighted GTRI.

In addition to regulating the lab-grown diamond industry, suggestions have been to reconsider the zero-tariff import of CPD from Dubai under the India-UAE comprehensive economic partnership agreement (Cepa), as per which the CPD can now be imported at zero duty with just 6 per cent value addition in Dubai. This change is likely to put pressure on the margins of domestic manufacturers of the already struggling industry.

Kishan Singh

BW Reporters The author is a trainee content writer with BW Businessworld