The rupee’s dramatic slide this week, and in the months before, is forcing India to refine its place in the diamond market. India’s large manufacturers ought to prosper from the depreciating currency while its trading activity continues to be compromised.
The rupee slid to an all-time low of 69.22 against the dollar on Wednesday, recording its biggest one-day fall in 18 years. Suddenly, the 70 level doesn’t sound as crazy as it did not so long ago. The currency has lost more than 17 percent in value since the beginning of the year, with the sharp declines beginning in mid-May.
Of course, the weak rupee does little to bolster India’s domestic diamond and jewelry market. The cost of living in India has increased and consumer confidence has slipped as economic growth has slowed. Wholesale and retail jewelers – already faced with a prohibitive 10 percent gold import duty, prescribed by the government to shrink its current account deficit – have to pay escalating prices for their dollar-based product material. Gold prices in rupee terms hit a record high this week.
Therefore, domestic diamond jewelry demand, which represents about a 9 percent share of the global wholesale pie, has slumped in recent months. Speakers at the recent Rapaport International Diamond Conference (IDC) in Mumbai said they expect growth to remain moderate in the mid-term, primarily due to macroeconomic factors.
India’s manufacturing sector is certainly not exempt from the challenges that the weak currency presents. With local bank credit provided in rupee terms, already expensive rough has appreciated by 17 percent for leveraged Indian buyers, when accounting for the foreign exchange translation alone. Many small-to-medium sized manufacturers who supply the local market have closed their factories or shifted their operations to trading polished as a result.
However, larger manufacturers with access to dollar financing, and who are supplying the export market, stand to gain. In fact, the weak rupee may well increase India’s competitive edge in manufacturing as labor costs in dollar terms have been significantly reduced. As long as they’re financed in dollars, and buying and selling their diamonds in dollars, their rupee costs have come down.
But in order to take full advantage of that, they will need to work toward inducing lower rough prices. The Indian collective still has the influence required to achieve that. And its liquidity situation should force manufacturers to refuse high-priced rough. Initial reports of a decrease in the price of smaller goods at this week’s De Beers sight are therefore encouraging.
Simply put, India’s greatest opportunity in the industry rests in leveraging its diamond manufacturing position.
The prospect to develop Mumbai into the leading international rough and polished trading center appears to have passed. Rather, government measures have served to discourage foreign companies from operating in the country. The lack of international presence at the recent India international Jewellery Show (IIJS) was testament to that.
In fact, the claim made by this column in March 2012, after the government introduced a 2 percent import duty on polished diamonds, has proved correct. “The tax will ultimately limit India’s competitive edge, and with it, the local industry’s growth opportunities,” this column wrote at the time (see editorial “Protecting India,” published on March 2, 2012). While the duty was designed to strengthen local manufacturers against rising foreign dealer competition, it had the effect of diminishing Mumbai’s importance as a trading hub.
Finally, this week, the Gem and Jewellery Export Promotion Council (GJEPC) spoke out against government measures, albeit focusing on the gold sector. Vipul Shah, chairman of the GJEPC, said he expects unemployment will rise in the jewelry sector due to the recent increase in the gold import duty from 8 percent to 10 percent.
“There will be a problem in the sector. Moreover, gold will not be available so there will be no work and this will further lead to unemployment in the sector,” Shah told SME Times. “We want the government to reassess the hike [in the] import duty.”
He ought to extend that call to abolish the 2 percent duty on diamond imports. Because other diamond centers have taken note of India’s vulnerable position.
Israeli and Belgian dealers, among others, sense an opportunity, and the buzz this week on the trading floor of the Israel Diamond Exchange (IDE) bore witness to that. This year, global traders are looking at the U.S. and International Diamond Week in Ramat Gan, rather than IIJS, to create momentum ahead of the all-important September Hong Kong show. If anything, while prices were firm in Israel, there is growing concern that Indian suppliers will dump goods at lower prices in Hong Kong to generate liquidity.
Much depends on the liquidity situation. The Indian banks, often blamed for enabling the rough price bubble through their easy credit in recent years, are changing policy. Global banking regulations are forcing them to insist on international standards and greater transparency, while high-profile industry defaults have increased their caution toward the industry. Finally, their own exposure to the weak rupee has influenced more prudent lending.
Tighter credit, coupled with high rough prices and the rupee’s fall, has brought about a liquidity crisis in India’s manufacturing sector. And as liquidity continues to squeeze, so will India’s ability to buy rough. One should expect a rupee-driven decline in rough prices in the coming weeks. When that happens, it should enable local cutters to gain a competitive advantage in manufacturing from declining labor costs.
Therefore, it seems that over-regulation and the depreciating rupee have forced India’s diamond industry into a manufacturing corner. That’s where its strength lies and that’s where it can maintain its competitive edge.
Ultimately it will take some time before India’s position settles. Many have predicted the rupee will reach 70 for some time. Now that the currency is almost there, it’s not clear how much further it will depreciate. A level of 75 or even 80 against the dollar is not out of the question.
What is understood is that India’s diamond industry is in a state of transition as a result. While the country was so savvy to gain market share in the trading space just a few years ago, that advantage is slowly eroding. At least while the rest of India’s diamond and jewelry industry struggles for stability, the large manufacturers may see some light, in an otherwise bleak situation.