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India’s Gem & Jewelry Lobby

Editorial

Feb 8, 2013 8:00 AM   By Avi Krawitz
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RAPAPORT... The recent proposals made by the Gem and Jewellery Export Promotion Council ‎‎(GJEPC) for the 2013-2014 Union Budget are a step in the right direction but are not far-‎reaching enough. One hopes the government will give the recommendations sufficient ‎consideration as it makes its final adjustments ahead of finance minister P. ‎Chidambaram’s budget speech on February 28.‎

The most significant of the proposals is reducing the rate at which business income tax is ‎calculated from 6 percent of turnover to 2.5 percent and introducing a duty-free quota for ‎polished diamond imports amounting to 15 percent of a company’s previous year ‎exports.‎

It wasn’t so long ago that the GJEPC was lobbying for last year’s introduction of a 2 ‎percent import duty on polished diamonds. The council’s motivation was to curb round-‎tripping, whereby businesses took advantage of the free duty by exporting and ‎immediately reimporting the same goods to artificially inflate their export volume and thus ‎qualify for additional bank financing.‎

The import duty had more than its desired effect. Coupled with weak foreign demand, the ‎duty influenced a dramatic reduction in India’s polished diamond trade in 2012. The ‎country’s polished exports fell 37 percent to $16.99 billion during the year, while polished ‎imports slumped 72 percent to $5.59 billion. This column’s assertion that round-tripping ‎needed to be tackled by implementing tighter bank lending practices rather than via ‎restrictive tax policy remains as true today as it was argued a year ago (see editorial ‎‎‘Protecting India’ published on March 2, 2012). ‎

Still, the GJEPC has noted that India’s lower foreign trade is currently more reflective of ‎the reality as a result of the duty. But it has also taken its toll, discouraging foreign traders ‎from doing business in India and diminishing the country’s competitive edge. It’s likely ‎that a significant volume of polished diamonds that would otherwise have passed through ‎India are now being routed through Dubai, Hong Kong or other attractive trading centers ‎which do not charge such hefty duty. Throughout the past year, the market has been ‎awash with reports of Indian nationals from large diamond companies relocating ‎elsewhere to facilitate such trade. ‎

The proposed duty-free window of 15 percent of the previous year’s exports may help ‎India recapture some of that lost business. However, whether by design or default, the ‎GJEPC proposal falls short of encouraging foreign companies in the polished sector to ‎operate in Mumbai. For India’s diamond industry to grow and avoid becoming just a ‎manufacturing hub a strong foreign presence in Mumbai is still required. Despite the local ‎industry’s vast numbers, India cannot sustain a vibrant trading hub on its own. More ‎foreign companies should be opening offices in the Bharat Diamond Bourse, but, barring ‎Rapaport – which opened its new India headquarters there this week – and a select few ‎others, they are not.  ‎

To its credit, while the GJEPC is focused on raising India’s polished trade numbers, ‎encouragingly, it seems to be making progress in lobbying the government. This week’s ‎announcement that India has re-introduced a provision for setting up private or public ‎bonded warehouses for the gem and jewelry sector is an accomplishment of no small ‎measure. ‎

As a result, companies can avert paying the respective duty on polished diamonds, ‎colored gemstones, uncut and unset precious and semi-precious stones by importing the ‎goods to a designated special economic zone (SEZ) or public bonded warehouse and re-‎exporting them provided they add at least 5 percent value to the goods during the holding ‎period. Again, the move will encourage further diamond and jewelry manufacturing in ‎India, but not trading. ‎

Similarly, the council’s recommendation to establish special notified zones for the import ‎and trade of rough diamonds is aimed at enhancing its rough supply to the manufacturing ‎sector. It is seeking to attract the likes of Rio Tinto, ALROSA, and other miners as well as ‎some large dealers who would compete to sell rough in the country. Having increased its ‎rough imports by volume by 3.7 percent in 2012, the GJEPC notes that an increase in ‎manufacturing leads to increased employment and a rise in diamond jewelry exports, ‎which ultimately has a positive impact on India’s balance of payments.‎

That may be so, but there remains a concern that the country’s manufacturing needs, ‎which are arguably already sated, are overshadowing its long term interest to have ‎international diamond traders come to Mumbai to buy and sell polished diamonds. ‎

The government’s perspective is different and understandable. Faced with one of the ‎widest budget deficits among the world’s large emerging economies, the country is ‎unlikely to meet its initial deficit target of 5.1 percent of gross domestic product (GDP) for ‎‎2012-13. Fitch Ratings this week warned of a possible downgrade if the country does not ‎meet its revised fiscal goals. ‎

Equally worrying, the country’s current account deficit hit a record high of 5.4 percent in ‎the second quarter that ended September 30, 2012, and the combined effect of the two ‎deficits likely contributed to the significant weakening of the rupee in 2012. Adding salt to ‎the wound, the government on Thursday lowered its growth forecast to 5 percent for the ‎fiscal year that ends on March 31, 2013, below analyst expectations.  ‎

The government has responded with an attempt to curb imports, targeting its intake of ‎precious metals. Last year, along with the 2 percent import duty on polished diamonds, ‎the government implemented a 6 percent duty on silver and 4 percent on gold – which it ‎raised to 6 percent just a few weeks ago – surprisingly, ahead of the budget speech.  ‎

While these actions may be required to reduce the current account deficit, they are ‎hurting the local jewelry trade and diminishing India’s historic penchant for all things shiny. ‎India’s gold jewelry consumption fell 16 percent year on year to $27.42 billion in the 12 ‎months up to September 30, 2012, according to the World Gold Council’s latest Gold ‎Demand Trends report. The increased duty is expected to further reduce jewelry ‎consumption as gold products will likely become more expensive to retail. ‎

The GJEPC is therefore in a sensitive position given the country’s fiscal requirements ‎and understandably needs to choose its battles. The council’s budget recommendations ‎were cautious and will hopefully prove effective come February 28. But it needs to take ‎the next step thereafter, which would require more of an open-door policy to allow foreign ‎entities a space in the market. For beyond the trade numbers, the local industry needs to ‎grow. And it cannot do so in an insular, non-competitive environment. ‎

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

Follow Avi on Twitter: @AviKrawitz

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


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