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DIAMONDS: INDIA'S LITTLE
GEMS
Part 1: A cut above the
rest
By Tony Allison
Although
India currently enjoys undoubted dominance in the
world’s cut and polished diamonds market, China is
emerging as a viable rival, if not in the near term,
certainly in the longer term. As one diamond dealer in
Mumbai, the heart of India's diamond cutting industry,
succinctly comments, "We'll have to be very cautious
with China’s foray into the diamond processing
industry."
For the time being, though, India can
bask in some reassuring statistics. In value terms, the
country accounts for approximately 55 percent of the
global polished diamond market, 80 percent by caratage
and 95 percent by pieces (the raw diamonds are imported
from diamond-producing countries, cut and polished in
India, and then exported).
In terms of value,
India's diamond exports during the current fiscal are
expected to be around US$8 billion, against $7.53
billion in 2001-02, according to figures released by the
Gem and Jewelry Export Promotion Council (GJEPC),
accounting, when combined with gems and jewelry, for
almost 20 percent of the foreign exchange earned by
India. India's focus areas include the United States
(more than half), Japan, Europe, the Middle East and
other emerging markets.
Exports during April to
August 2002 witnessed a healthy 30 percent growth in
rupee terms, and over 25 percent in US dollar terms.
During this five month period, the industry exported
goods worth $3.4 billion, up 25.19 percent from the $2.7
billion of the same period of the previous year. The
diamond industry has grown at an average rate of 30
percent over the past five years, and analysts say that
this trend is likely to continue.
The rough
diamonds processed in India are overwhelmingly the tiny
ones that cannot be shaped to intricate designs by the
automatic machines used by other leading diamond
processing countries, such as Israel and Belgium, which
deal with much larger stones.
Most of India's
diamond merchants are based in Mumbai since it is easier
to access capital there (Mumbai being the finance center
of India) and also because of its international airport
and the domestic airport being connected to practically
every other airport in India. Mumbai houses over 1,400
active diamond exporters out of India's 1,500. Mumbai's
Santacruz Electronics Export Processing Zone, which is
primarily developed for the IT industry, is almost
engulfed by the diamond industry. But the craftsmen who
manually work on the roughs are not locals. They, too,
are "imported" from other Indian states, such as Gujarat
and West Bengal. The diamond cutting trade employs well
in excess of a million people.
The Chinese
threat
China, though, is nibbling away at the
diamond processing pie that India controls, with
increasing numbers of diamond processors from Israel and
Belgium, and even India, setting up bases in China, for
a variety of reasons:
The labor force is cheap and
disciplined.
China's economic growth is continuing,
and the number of wealthier consumers within the country
rising, while India has to rely almost solely on
exports.
De Beers, the world's largest supplier
of rough diamonds, is increasingly favoring China in
order to reduce its dependence on India.
The quality of Chinese workmanship is
steadily improving.
Policies such as single window
clearance largely favor foreign
businessmen.
Perturbed by this development,
India's GJEPC recently sent a delegation team to China
to study first-hand the latest developments. They noted
that one of the reasons players from Israel and Belgium,
two of the largest markets for rough and processed
diamonds - especially of higher value diamonds -
preferred not to opt for India for setting up their
processing facilities was India's battalion of
bureaucracy - more than 22 different authorities control
the activities of the players in India.
"China,
despite its socialistic style of governance, is more
capitalist, while India, despite its democratic
environment, is seen as more socialistic," says a
diamond polisher. "For overseas players, there is an
environment of fear which; also, our labor laws and
labor attitudes are not too conducive for them to
function as freely in China," adds a leading diamond
jewelry exporter.
"India has started to feel a
pinch because of multi-pronged competition," says
Nitisha Banerjee, a Mumbai diamond trader. With China
joining the diamond club and with the quality of
workmanship there said to be improving, the world's most
populous country could affect India's diamond trade,
Banerjee opined.
And China is aggressively
encouraging India's owners to set up shop there. Traders
claim that in the past couple of years, several dozen
leading diamond companies from India have relocated.
"The number could well go up in the days to come,"
traders add. "Lured by the superior jewelry design
skills of the Chinese, they have set up workshops in
China," says Satyendra Shukla, a trade analyst.
He perceives China as a growing threat, mainly
in diamond processing and the cutting business. He
believes that while there is no immediate threat in the
short term, it is only a matter of time before the
Indian diamond industry feels the pinch.
China
still has a long way to go, though. India processes 120
million carats of diamonds a year, compared to China's
2.4 million carats, which translated into diamond sales
of just $740 million. China also has only about 10,000
diamond cutting and processing units, compared to
India's 800,000 to 1 million. China has about 25,000
people working in the industry, compared to India's well
over a million.
However, China had the advantage
of cheaper labor, coupled with an impressive quality of
workmanship, Shukla said. Looking at the potential in
China, De Beers, the South African conglomerate, has
been busy in developing the Chinese market since 1997,
traders said.
Diamond merchants say that the
first signs that China was gaining priority in De Beers'
scheme of operations became obvious two years ago. They
point out De Beers' Millennium boxes, for which the
sales promotion competition was held in India, but which
was ultimately bagged by Hong Kong for processing.
However, De Beers officials are reported to have
"pacified" the trade in India by saying that their
apprehensions were unfounded and that its Indian clients
formed a significant number of the total clients.
Areas of concern
Maharashtra, the state of which Mumbai
is the capital, imposes dual taxation on the diamond
trade. The taxes are levied at two stages, first on the
loose jewelry and later on studded ones. The industry
has made a plea to the government of Maharashtra to
abolish this double tax, as has been done by other
states, like Gujarat and West Bengal. China, meanwhile,
has reduced its diamond tariff to zero from 3 percent
for crude diamonds and to 9 percent for finished
diamonds. And the tax on crude diamonds has dropped from
33.9 percent to 17 percent, and that for finished
diamonds from 41.7 percent to 17 percent.
Diamond producing countries such as
South Africa and Ghana, instead of transporting diamonds
to India, are setting up their own finishing operations.
Response
Accustomed to surviving in a
monopolistic environment, competition, however small, is
looked upon as a threat to the Indian industry, say
market experts. That's why the Indian diamond industry
is gradually gearing up to protect its turf from cheaper
competitors. As a diamond merchant put it, "We are also
becoming competition savvy."
The industry in
India is dominated by small family-controlled
businesses, but these dynasties are starting to
recognize the need for change. Companies are taking
steps toward more professional management and
modernization has become the buzzword, and India is even
moving into larger stones, currently the preserve of
Belgium and Israel. To do this, merchants are importing
more sophisticated machines and cutting lasers.
Since India already enjoys domination in the
world cut and polished diamond market, scope for further
growth in diamond exports is limited. Hence, if India's
gems and jewelry sector is to substantially increase
exports, the best strategy lies in the jewelry
sub-sector. Given the fact that the global market for
stone-studded jewelry is expanding, there is scope for
expansion in India’s diamond-studded jewelry exports.
Bulk buyers from the United States and the
European Union are increasingly buying Indian diamond
studded jewelry. The main reason for this development:
its affordability. Retailers in the US, such as Walmart,
Sterling Zales and Penney, among others, are now
considering to source their requirements directly from
India.
Gold, not glitter
Even though
Indians are the largest buyers of gold in the world -
over 800 tonnes annually - the same fascination does not
extend to diamonds. And while Mumbai and, to a lesser
extent, places like Surat in Gujarat state are thriving
centers for polishing diamonds, only a small percentage
of the finished product find their way into the local
markets. "The average Indian would not know the
difference between a carrot and a carat when it comes to
diamonds," says Sanjay Ahire, an analyst who tracks the
gems and jewelry sector for Mumbai-based broking firm
Ishwardas Lalwani & Brothers. "Indian diamond
merchants are so prosperous because of the exports
market."
Yet diamonds are one of the most
concentrated forms of wealth in the world. For example,
compare the price of gold with the price of diamonds.
Gold is considered valuable at about $300 per ounce. But
look at diamonds, which are sold in carats. A good
quality 1 carat diamond sells for about $5,000, and
there are 142 carats in one ounce. That means that 1
carat diamonds sell for $5,000 x 142, or about $710,000
per ounce.
(Additional reporting by Raju
Bist in Mumbai and Anil Sharma in
Jaipur.)
Part 2: Rough business and the
Russian connection
(©2002 Asia Times Online
Co, Ltd. All rights reserved. Please contact content@atimes.com for
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