India's flawed diamond
dream By Sudha Ramachandran
India, having elbowed aside Antwerp in the
international diamond cutting and polishing
business, is looking to boot the Belgian city from
its perch as capital of the world’s diamond
market.
About 80% of the world’s rough
diamonds and half its polished diamonds are bought
and sold in Antwerp, home to 1,500 retail and
wholesale diamond companies and four diamond
exchanges. Six decades ago, the city was home to
all the world’s diamond exchanges. Four remain,
while 20 have sprung up in other parts of the
world, including Dubai and Mumbai.
Indian
traders arrived in Antwerp in the mid-1970s,
challenging the centuries-long control by Orthodox
Jews of the diamond trade
there. By the 1990s, the Jews
were ready to surrender and Indians today account
for two-thirds of Antwerp’s US$36 billion diamond
trade, with the Jewish share of trade reduced to
just 25% from 70% two decades ago.
The
Indian diamantaires (as Antwerp’s diamond traders
are called) belong to a few hundred families, many
related by marriage, from the Jain community from
Palanpur, a small village in Gujarat. They are
recognized for their entrepreneurial talent and in
a trade that runs on trust, the Indians - like the
Jews before them - have benefited from close
family ties.
The Indian diamantaires
started at the bottom end of the business, working
on low-quality rough diamonds that existing big
players weren’t interested in. Then they
outsourced the cutting and polishing business to
India - the cost of labor was 80% lower back home;
the finishing work went to family-owned businesses
in Mumbai and the Gujarat port city of Surat.
Larger profit margins enabled the Indian
diamantaires to invest and expand and they climbed
the value chain, buying and selling pricier stones
until they soon overtook their Jewish counterparts
in the trade.
Yet even with Indians
dominating the trade in Antwerp, the city’s
decision-making business councils remained elusive
to them for several years. That began changing in
2003 when two Indian diamantaires were elected to
Antwerp’s High Diamond Council, the governing body
of the city’s diamond industry. In 2006, Indians
won five of the six elected seats on the 11-member
board.
Surat meanwhile emerged as the
center of the diamond cutting and polishing
business, to the point that 92% of the world’s
diamonds are now cut and polished there and the
800,000 workers involved earned India $11 billion
in exports last year. Antwerp now has a bare 800
cutters and polishers, down from 25,000 in the
1970s.
Having eclipsed Antwerp in the
cutting and polishing business, Indian diamond
traders want to make Mumbai the world’s diamond
hub. They have the backing of the Indian
government, which announced zero duty on import of
polished diamonds last year, when almost $2
billion worth of cut and polished diamonds were
imported. That will give a further boost to the
diamond jewelry-making business.
The
Reserve Bank of India, meanwhile, is helping
traders by allowing advance payment without any
bank guarantee for procurement of rough diamonds
from five miners - Rio Tinto, BHP, Angola's
Endiama, and Russia's Alrosa and Gokhran. The
commerce ministry has also held talks with
governments of diamond mining countries to secure
a stead long-term supply of roughs - or uncut
stones.
The Bharat Diamond Bourse, a
single window operation facility and dedicated
custom house to boost trade, is being built.
Intended to be among the most modern and secure
diamond trading hubs in Asia, it is being touted
as India’s answer to the Antwerp Diamond Center.
The purchase of diamonds direct from
miners helps to reduce India's dependence on
trading hubs other than Antwerp, such as London,
and cut intermediary costs, while it may help to
ensure long-term supplies from Russia and mining
countries in Africa, at the same time reducing the
role of the sales and marketing arm of South
African giant De Beers, the Diamond Trading
Corporation, which controls 80% of global trade in
rough diamonds.
In 2006, Diamond India
Limited, which consists of members of the diamond
trade, was set up to source and procure roughs
directly from Russia, Botswana, South Africa,
Angola and others and sell them to Indian
manufacturers.
Import of rough diamonds
from Russia has already started. The purchases are
being made from state-owned Russian firms such as
Alrosa and Gokhran. According to reports, Indian
importers have been ordering diamonds worth about
$10 million to $12 million directly from Russia
and that amount could soar. "We are ready to buy
up to $1 billion worth of diamonds annually from
Russia," Praveen Shankar Pandya, convenor for
rough sourcing at the Gems and Jewelry Export
Promotion Council, has said.
To encourage
stronger partnerships in Africa, India will offer
in return for uncut stones training in diamond
cutting and polishing and help to build local
industries by providing technical assistance.
All that, however, may not be enough to
overcome the obstacles standing between India's
diamond firms and their dreams. Not least is the
country's own bureaucracy, typified by the
lethargic progress of the Bharat Diamond Bourse
project. Perhaps as damaging, industry watchers
say the diamond industry in Mumbai is not
transparent, with hawala transactions (or informal
value transfer systems) common, while security is
far from what is available at other trading
centers.
Indian bureaucracy The
involvement in the trade of numerous government
officials adds to costs and inefficiency. Instead
of a one-window interaction with the government,
diamond companies in India have to deal with
multiple ministries and at central, state and
local level. Value added tax has to be paid - only
to be returned, though only after the government
has held on to it for a while; diamond traders
complain this is effectively a block on funds.
Recent developments have also taken the
polish from India’s ambitions. The supply of
roughs is slowing and likely to worsen following a
decision by De Beers to cut out out several Indian
sightholders (clients) under its global rough
diamond distribution plan. A strengthening rupee
and the economic slowdown in the US too have taken
their toll.
The rupee gained against the
world's leading currencies last year, notably
12.3% against the US dollar, undermining the
competitiveness of India's diamond jewelry
exports. Exports to the US, which accounted for
60% of diamonds exported from India in the 2006-07
financial year, fell almost 50% from 12 months
earlier, a decline aggravated by a 6.5% import
duty on diamond jewelry from India though not
applicable to countries like Thailand.
The
impact on orders has been felt in the polishing
business, with around 2,000 polishing units in
Surat being closed in recent months, according to
business daily, Mint, citing Pravin Nanavaty, a
member of the Gujarat Hira Bourse, an association
of diamond traders from that region.
African diamond producing countries are
meanwhile considering imposing exports duties of
5-7%, which will drive up the cost for Indian
imports of roughs; at the same time African
producers are demanding that polishing units be
set up on their soil, which will force the further
closure or relocation of Surat’s polishing units.
India’s share of the diamond processing
business, which stands at 57% now (in value
terms), could shrink to 49% by 2015, according to
a survey by consulting firm KPMG,
India's
polishers also face intensifying competition from
other countries. China is expanding its cutting
and polishing business, and with over 30,000
polishers stands second only to India. It has been
processing larger diamonds for jewelry making and
importing roughs worth about $1 billion a year.
Several Indian companies have in fact set up
polishing units in south China.
Dubai is
also challenging India's ambitions, attracting
diamond traders with new facilities and incentives
such as tax holidays. Helping the Gulf state, and
unlike Antwerp which is bound by EU rules, Dubai
is far more lenient regarding the transfer of
money.
The progress of Dubai's Almas
(Diamond) Tower perhaps best captures the
difference in ambition and determination between
the two country's diamond businesses. Work on the
Almas Tower began in 2005; it was completed on
schedule in December. In comparison, Mumbai's
Bharat Diamond Bourse, conceived in 1992 and due
to be completed in 1996, has yet to get off the
ground. The new deadline for the bourse’s opening
is early 2009.
Sudha
Ramachandran is an independent
journalist/researcher based in
Bangalore.
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