Is there any merit to criticism that the Indian diamond industry is using bank financing for “narrow and destructive interest of speculating on [sic] rough prices,” as the new president of IDMA (the International Diamond Manufacturers Association) recently claimed? Or are Indian members of the industry simply making good use of the advantages their government provides them with – just as other diamond centers do?
Maxim Shkadov’s rather blunt snipe at the Indian diamond industry raised a few eyebrows, and a few snickers. After all, many in the diamond centers outside of India share the sentiment that Indian traders have an unfair edge in the form of generous and low-cost bank financing.
This is not the first time that Shkadov, the managing director of Kristall Production Corporation (Kristall of Smolensk) has criticized India and its diamond industry. In March 2012, India’s minister of Commerce, Industry and Textiles asked that the Russian state repository, Gokhran, sell rough diamonds to India. Shkadov called the request “unethical.”
Unlevel playing field?
The diamond industry is an important contributor to India’s exports, representing some 7.5% of India’s total exports last year. To reach this level, the government of India decided many years ago to encourage exports (of all goods, not just of diamonds) and passed a law requiring local banks to earmark a percentage of their credit to finance exporters. This financing is available at a reduced rate and in U.S. dollars. Inevitably, some of the Indian banks chose to support diamond exports.
This government directed measure is not unusual. All countries take steps to build and support their local industries, and the global diamond industry has benefitted from it. Botswana, Namibia and South Africa practically forced De Beers to allocate goods locally so they could form local “beneficiation” enterprises – polishing plants are the common example.
Favorable conditions also exist in Israel where traders are exempt from tax on diamond imports and pay a miniscule 1.75 pro-mille export tax that goes directly to pay for the local industry’s marketing initiatives and other related programs.
“All countries take steps to build and support their local industries, and the global diamond industry has benefitted from it.”
Russia is no exception, as Shkadov himself stated last year when he said that sales of rough diamonds from the stocks of the Gokhran were “performed by virtue of the budget legislation only to Russian manufacturers.” Indeed, Alrosa is required to supply some of its production to Russian manufacturers.
Kristall is celebrating 50 years since its formation by the Russian government as a beneficiation program. During most of this time, and up until just a few years ago, the company benefited from subsidized rough allocations.
Industry cross fire?
Feeling blindsided, the Indian industry quickly said Shkadov’s recent comments were “in bad taste,” and Gem & Jewellery Export Promotion Council (GJEPC) chairman Vipul Shah “expressed his deep displeasure,” at the IDMA president’s remarks.
However, it is true that some Indian traders did take excessive advantage of the generous financing, and “round tripping” became a major issue from 2008-2011. That said, the Indian industry understood that the practice must be stopped, and took the extraordinary step of lobbying the government to slap a 2% import tax on polished diamonds in January 2012. The result: in February polished diamond imports were slashed 80% and exports by 53.7%. (In the September-December 2011 period, polished exports totaled $4.2 billion; a year later they fell to $1.9 billion, less then half.)
Shkadov may have made an error (we all make mistakes, but how we go about correcting them is key.) As president of IDMA, Shkadov represents all manufacturers, and the majority of them – by value, volume and count – happen to be Indian. He did not address an issue in a constructive way, but simply slung mud at the majority, those that carry most of the burden. There are better ways to address these concerns.
Leveling the playing field?
Diamond manufacturers operate in the toughest sector of the diamond industry and are always fighting to get and protect their edge. That is why they set up operations in locations where the activity makes the most economic sense: either the cost of labor is low or governments mandate availability to local rough diamond supplies.
Be it tax breaks (Israel, Dubai), government ownership (Russia, Botswana, South Africa), required local supplies (Russia, Botswana, Namibia, Canada, South Africa), subsidies (Russia, India) or any other measure designed to help local business, they are all beneficiation efforts, or, as Shkadov may have been implying-protectionism.
In reality, the diamond game is a constant jostling to re-level the playing field – and tipping it in one’s own favor. In a competitive market, the best players always try to gain an advantage and the playing field will always tilt. The trick is to not let these efforts get out of hand, and do what is in the best interest of the local market, as well as the global market.