Diamond sector braces for competition

The scrapping of import duty on cut and polished diamonds, which opens up the Indian market for major international brands, is likely to benefit consumers in a big way even as domestic diamond jewellery makers expressed their hope of benefiting from increased competition.

With the latest tax sops, the Rs 70,000-crore Indian diamond sector is on the way to becoming a "one-stop shop" for diamond trading in the world.

Recently, the finance minister scrapped the 3 per cent import duty - brought down from 5 per cent in the last budget - on processed diamonds.

The step would make India a global diamond trading hub where traders can offer diamond jewellery to a global market following the current trends in the world, said an official at the leading diamond processing unit, welcoming the move. But, conversion rate still remains a problem which not only results in inventory loss but also increased labour charges. Explaining the complexities of this dollar dominated inventory, the official said that an inventory of Rs 40 crore around the same time last year would come down to not more than Rs 35-36 crore today because of the over 10 per cent rupee appreciation.

But, the duty reduction would not have any major impact on diamond prices as it would enhance competitiveness, said Navin Mehta, president, Bombay Diamond Merchants' Association. It would have no impact on the volume and value of trade as major processing work, approximately 90 per cent of the world, is done in India itself, he added.

Supporting the move, Sanjay Kothari, chairman, Gems & Jewellery Exports Promotion Council (GJEPC), said that since diamond processing is an export-centric sector, incentivising it would mean boosting foreign currency inflows into the country.

"Smooth trade practices cut both ways. The government had earlier given us the half-hearted measure of reducing the import duty from 5 to 3 per cent in the last budget. We had, in our presentation, said to the government that bringing down import duty to 'nil" would not affect the domestic industry at all," Kothari said.

"The tax cut could also help us get an extension of the Generalized System of Preferences (GSP) which is expiring on June 30, as we can show to the US government that we are ready to import cut and polished diamond at 'nil' duty to India. This would enable diamond jewellery manufactured in the US to find a market in India," he said.

But suspicion lingers that India's $4-billion jewellery exports to the US is under threat because of GSP extension.

Instituted in 1976, the GSP was aimed at promoting the economic prosperity of underdeveloped countries with over 4,650 selected products from 144 countries receiving a preferential entry into the US. Under the programme, diamond jewellery were imported duty-free to the US, which proved to be a boon for all those countries, especially since diamond processing had become a low-margin business.

Surprisingly, India became a part of the GSP programme despite the country not falling under the norms laid out by the US authority. This was possible because of the Indian government's sincere efforts, industry sources said.

Currently, 60 per cent of of the global diamond exports at $17 billion is being processed in India by importing roughs, while the remaining 40 per cent is processed in Israel, Belgium, US and China.

While the new move would enable the domestic industry to import processed diamonds to India cheaply and open up entry for multinationals, local jewellery makers played down fears by saying that it would enhance the performance of the domestic sector.