India’s flawed diamond dream

It is no mean achievement to outwit the Jews and this is exactly what the Indian traders from Gujarat have achieved in the diamond cutting and polishing business. Arriving in Antwerp only in 1970s, the Indians successfully challenged them and by 1990s the Jews were ready to surrender. However, it is unfortunate that this unheard of feat has not been suitably rewarded by the Indian Government. Today these traders face the ill effects of the rising value of the rupee.

by REPORTER@DAYAFTERINDIA.COM

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.

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 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.