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Key Issues of the Sector

Unorganised Sector

The gems and jewellery sector in India is unorganised and fragmented. Around 90% of the players operate in the unorganised sector mostly in family-run operations. The nature of the sector prevents it from achieving economies of scale. Also, being largely unorganised, the sector mainly uses labour-intensive and indigenous technology that affects their growth prospects. Further, the sector finds it difficult to enhance their global competitiveness due to difficulties in adopting technologies as a result of inadequate financial capital and high labour costs per unit.

Threat from China

Currently, China is the second-largest diamond processing centre in the world after India; however, it is slowly catching up and is threatening to displace the Indian gems and jewellery sector from its dominant position in the world. The labour cost in China is the lowest, just like in India; however, the gap between the two countries is narrowing slowly. Besides, the Chinese economy is growing rapidly and is creating a demand for gems and jewellery in the domestic market. Further, many diamond manufacturers from Belgium and Israel are setting up manufacturing plants in China. India also faces threat from China in terms of technology adoption, which allows China to process diamonds at a more competitive price.

Predominance of the US market

The Indian gems and jewellery sector is pre-dominently dependent on the US markets, which is its top export destination. The growth of gems and jewellery sector is heavily dependent on the growth of demand in the US market. However, the recent appreciation of the rupee vis-à-vis the US dollar and a slowdown of the US economy have aggravated the concerns for the sector. All these factors necessitate India’s venture into other geographical locations. During FY07, the exports to the US market registered a growth of 14% over exports of FY06; however, owing to the slowdown in the US economy, the exports grew only 1.15% in FY08 over the previous year. In the current situation the heavy dependence on the US market has affected the exporters as they are facing a drop in orders and delayed payments.

Exchange Rate/Currency Risk

The gems and jewellery sector is affected by the rupee/dollar exchange rate because it is export-oriented. Any volatility in the exchange rates affects the margins of the players. For instance, the recent appreciation in the rupee against the dollar had made the exports of gems and jewellery less competitive in its key export destinations.

High Level of Inventories

As the gems and jewellery sector is highly dependent on imports for its raw materials, the players have to maintain a high level of inventory. However, maintaining this inventory becomes difficult for the players during the slack season, as it carries inventory price risk. For instance, due to the current recessionary trends, the demand slumped and inventory piled up much to the chagrin of the players.

Decreasing Diamond Reserves

The supply of rough diamonds is expected to fall in the near future as the diamond reserves are decreasing. There has been no major diamond reserve discovery since 2003, when reserves were last discovered in the Diavik Diamond Mine in Canada. The reduced supply will push up the prices of rough diamonds, which will further put pressure on margins. Future supply levels are largely dependent on the industry’s ability to identify new diamond deposits.

Competition from Other Luxury Goods

With the increase in disposable income and the change in standard of living, the demand for luxury goods such as perfumes, consumer electronics, leather, automobile, gadgets etc are also increasing. The gems and jewellery sector is experiencing competition from these luxury goods, which is eating into the market share of the sector.

Beneficiation in Mining Countries

India is facing a threat from the emerging cutting and polishing centres in the diamond-producing countries such as South Africa, Ghana, Angola, Botswana, Namibia etc. The local government is increasingly pressurising the African countries for processing locally-mined materials such as diamonds within the country itself to increase earnings through value addition to the vast natural resources that these countries possess. South Africa has launched a draft Beneficiation Strategy for the minerals industry of South Africa in March 2009. The newly-formed African Diamond Producers Association (ADPA) is advocating establishing a joint policy that would support beneficiation across Africa. This could lead to fewer rough goods being made available on the open market and in creating a threat to the existing diamond processing centres such as India, as new processing centres comes up.

Global Economic Slowdown

The global economic slowdown has hit the Indian gems and jewellery sector hard. As the sector was primarily dependent on exports to the US and European countries, the meltdown in these countries affected the gems and jewellery sector to a great extent. The players faced issues relating to inventory build-up and liquidity pressure. A number of diamond units in Gujarat were shut down that rendered thousands of workers jobless. Further, the bank finance, which was largely in dollar terms, also faced a setback due to foreign exchange rate fluctuations. This further added to the woes of the players who were struggling to come out of the global recession.

Even though the sector is in the recovery mode, owing to a gradual recovery of global markets, the credit cycle of the sector has changed drastically. The delayed payments from customers have raised the interest outflows for the companies.

Synthetic Diamonds

The sector also faces a challenge in the form of integration of synthetic or man-made diamonds. With the advent of technology, it is difficult to differentiate between natural and synthetic diamonds. It may so happen that the synthetic diamonds are passed on as real diamonds and in the long run, this could affect the credibility of the sector. Further, as synthetic diamonds are much cheaper and identical to the man-made diamonds, these diamonds may find a clientele that is a substitute to the natural diamond and may end up eating into the market share of the diamond industry.

Issue of Conflict Diamonds

India is the largest importer of rough diamonds and a leading player in cutting and polishing of the same, therefore, it runs the risk of dealing with conflict diamonds. Conflict diamonds are those that are mined illegally in African countries such as Angola, Liberia, Sierra Leone and the Democratic Republic of Congo to fund illegal military wars. In spite of the KP certification, there are issues related to fake KP certificate. These fake certificates put diamond importing countries at a risk of dealing in conflict diamonds.

Opportunities for the Sector

Entering New Markets

The US has been the major market for Indian gems and jewellery sector over the years. However, with the current global slowdown, the dependence on the US market has affected the Indian gems and jewellery sector tremendously. The sector is exploring new locations to diversify business and to minimise the risk. Russia, Middle East and China are few of the emerging destinations that are witnessing an increase in jewellery demand. The Indian gems and jewellery players can tap these countries to diversify and increase their business.

Cutting and Polishing of Large-Sized Diamonds

India is one of the leading diamond processing centres of the world. India’s vast, low cost and extremely skilled workforce provides it with a competitive edge over other countries. However, it is predominantly involved in cutting and polishing of small-sized diamonds, which weigh less than one carat. India's cut and polished diamond exports have a high global share in terms of number of pieces; however, in terms of value the share is much lower. By moving up the value chain and processing larger stones India can further increase its value share in total exports. Large diamonds are less commonly found in nature, therefore, the price of a diamond rises exponentially with its size. Indian exporters who have dominance in processing of small stones have already started moving into cutting of large and medium size stones. For moving up the value chain, the industry should try forward and backward integration. Hence strategic alliances with producers of roughs and retailers of jewellery could lead to higher market share.

Given India’s low cost and skill labours, there exists an opportunity for processing large stones, which will provide the players with higher margins as well as rise in realisations on capex.

Value Addition

There exists a huge opportunity for Indian players to do value addition to the processed diamonds and to export diamondstudded jewellery. India is already a leader in processing small-sized diamonds and it also has inherent capabilities of manufacturing hand-crafted jewellery. Further, with its dominance in processing small diamonds, India has an advantage of manufacturing affordable diamond jewellery for the world market.

Jewellery Retail

The Indian retail sector is growing rapidly. This provides an excellent opportunity for the Indian players to manufacture and sell their jewellery through the retail channels that are fast catching up in the Indian markets. Further, this move will also provide an organised structure to the largely unorganised gems and jewellery sector and lead to further growth of the sector.

Outsourcing Hub

India can become an outsourcing hub for designing and manufacturing jewellery. There is an increased trend of outsourcing designing and manufacturing of jewellery from India by global retail players such as Wal-mart and JC Penny. The players in the sector can tap this opportunity to diversify business, reduce risk and increase revenues.

Outlook

The outlook for the gem and jewellery sector is positive. On account of the global recovery, the Indian gems and jewellery sector is also on a recovery mode. In December 2009, the exports from the sector grew by 45.35% as compared with the same period in 2008. According to GJEPC, the players received good orders for Christmas in 2009, which indicates a gradual recovery for the sector. The positive trend is expected to continue, as major economies are showing signs of recovery, which is resulting in fresh orders for the sector.

Further, the gems and jewellery sector is also expected to grow in the domestic market, going forward. As the per capita consumption of jewellery is low in India, there exists an attractive opportunity to tap the domestic market.