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India's Election Optimism

Editorial

May 23, 2014 1:17 AM   By Avi Krawitz
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RAPAPORT... At last, a positive mood has emanated from India’s diamond industry, albeit as trading remains fairly cautious. Sentiment has been bolstered by the victory of the opposition Bharatiya Janata Party (BJP) in the recent elections. Prime Minister-elect Narendra Modi was largely endorsed by the diamond industry, which has high hopes that he will rejuvenate domestic jewelry demand and help revive local diamond trading.

India’s diamond industry has endured a challenging time recently, and many count unfavorable government policies among the reasons for their struggle. Despite its massive diamond manufacturing capacity, India’s trade became increasingly insular under the previous government. Foreign companies found it difficult to operate in the country and Mumbai’s importance as a diamond trading hub was diminished. Locals navigated through slowing economic growth, reduced domestic demand, a dramatic rupee depreciation, higher import duties on gold (and diamonds) and limitations on foreign exchange holdings.

Modi, who until the election was the chief minister of Gujarat – the state in which Surat is located – was supportive of Surat’s diamond industry development during his term in office, and is widely considered to be pro-business.

As a result, Indian markets have soared since the election results were announced on May 16. The rupee has strengthened to 11-month highs below 59 to the dollar, while the Bombay Stock Exchange’s Sensex index is up 8 percent since the beginning of May. Significantly, foreign investors have a renewed interest in India and have poured more than $16 billion into Indian stocks and bonds in the past six months in anticipation of the Modi victory, according to a Reuters report.

The hope is that Modi will do on a national level what he achieved in Gujarat, as he helped the state emerge as one of the fastest growing regions in the country. In particular, the diamond industry is encouraged by its experiences in dealing with Modi. “Most people in the industry are Gujaratis and they know Mr. Modi very well,” said Vallabhbhai Patel, chairman of Kiran Gems, a Surat-based diamond manufacturer. “We’re confident that whatever he commits to, he delivers, which is why we endorsed him.”

For now, the industry doesn’t have too many direct demands of him. The 2 percent import duty on polished diamonds is a point of contention but is unlikely to be abolished. After all, it was introduced in March 2012 at the request of the Gem & Jewellery Export Promotion Council (GJEPC) in an effort to stop round-tripping – the practice of re-importing diamonds and then using them as new export transactions to procure additional bank financing.

Previous lobbying points that went unheard by the government include the possible introduction of a duty-free quota for polished diamond imports amounting to 15 percent of a company’s previous year exports. Some flexibility is required, for example, with suppliers being charged the duty on re-imported goods that were sent overseas for certification. A government directive states that customs officials should charge the duty if there is just a 2 millimeter variation in the measurements between the re-imported diamond compared to when it was first sent out.

Greater attention is likely to focus on easing gold import restrictions. The wider gem and jewelry industry might try to convince the Modi government to lower the import duty on gold, which rose from 4 percent to 10 percent in a very short time. The previous regime desperately sought to control its current account deficit by curbing gold consumption. Meanwhile, rupee-based gold prices hit record highs as the currency plummeted. As a result, costs for jewelers increased and gold demand continues to slump. India’s gold jewelry demand fell 28 percent year on year to $6.05 billion in the first quarter of 2014, according to the World Gold Council. Demand by volume dropped 9 percent to 145.6 tons.

It seems that Modi may be granted some breathing room from the industry for now. Patel noted that while there may not be any direct demands of the government yet, there is confidence that the new Prime Minister will support the industry when required. “We expect he will create an environment that will move the trade forward,” Patel said.

Time will tell exactly what those requirements will be, and whether he will, indeed, deliver.

Foremost on the diamond industry’s current agenda is to boost trading activity to complement its dominance in manufacturing. Coincidently or not, the Surat industry laid the foundation to establish the Surat Diamond Bourse on the eve of the election results announcement last week. Patel, who is heading the project, stressed that with 90 percent of diamond manufacturing done in Surat, their aim is to add trading value to their operations.

Skeptics question whether the trade can, or even should, shift from Mumbai to Surat, especially since they only recently moved from south Mumbai across the city to the Bharat Diamond Bourse (BDB). As one Mumbai-based trader stressed, “We just spent all that money moving to BDB so it doesn’t make sense to do it again.”

Mumbai has a logistical advantage over Surat given that it has an international airport and is considered India’s financial center. Mumbai is already a general trading hub, with established special economic zones designed to encourage foreign trade. In contrast, Surat’s airport is small, making the 3-hour train ride from Mumbai the most efficient means of getting there.

However, the cost of doing business in Mumbai is high, whereas Surat provides an attractive alternative. The Gujarat government is considered more favorable to business than the state of Maharashtra, which encompasses Mumbai. For example, Maharashtra has a 0.1 percent octroi charge – a duty for transporting goods across state lines – whereas Gujarat abolished its octroi. Rentals and labor costs are higher in Mumbai than in Surat, and Mumbai is more challenging to navigate with its busy traffic and vast geographical space.

Patel stressed that Surat offers a more peaceful and affordable lifestyle, and a more pleasant working environment, for companies who might consider moving. The more cosmopolitan Mumbaikars, on the other hand, might miss the high pace and energy of their city.

Furthermore, Patel expects that as one of India’s fastest developing cities, Surat’s infrastructure and logistics capabilities are destined to grow with the industry. That includes better hotels and more efficient air travel. But it will take time, and so will the bourse development. He anticipates the bourse will take about four years to complete with the potential to be five times the size of BDB. That in itself would be a testament to Surat’s competitive potential, considering it took almost two decades to build BDB.

Perhaps there’s room to grow diamond trading activity in both cities. Doing so would require a collective effort with strong government support to enable a favorable environment for conducting business in India. The growth of competing hubs such as Dubai should make such collaboration an urgent priority.

As Mumbai and Surat seek to develop as diamond trading hubs, the industry will want Modi’s continued support. At least the election fostered some optimism that he will put the country on the right track. Having endured a tough economic and political landscape in the past few years, the diamond industry has high expectations from India’s new leadership.

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.diamonds.net/weeklyreport/ or contact your local Rapaport office.


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Tags: Avi Krawitz, diamonds, GJEPC, India, jewellery, Jewelry, Narendra Modi, Rapaport
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