This brings into focus the bottomline for the industry. This industry cannot rest on its laurels. It must make in-roads into the more lucrative value-added studded jewellery segment. And with exports (around $850 million) at merely 1-1.5 per cent of the global studded jewellery market, the potential is immense.

The Indian diamond industry seems to be on a perpetual roller-coaster ride, up one moment, down the next. Mood swings are extreme: euphoria over success, opportunities and hopes for better days, side by side with despair over government apathy, bad performances and cyclical downswings.

The reasons for the change in moods are apparent. The diamond industry here is merely a processing centre, dependent on the government for infrastructure (which is poor), supply of roughs controlled by a cartel and most of the consuming centres at the mercy of economic turmoil, particularly during the ‘90s.

Alarmists
The mood has suddenly turned sombre even amidst celebrations over attaining the $5 billion mark. Self-doubts have surfaced as the initial elation of lower sights from the CSO continuing well into 1999 have given way to apprehension. Alarm because the cheaper and smaller goods, India’s speciality, are in short supply, both from De Beers as well as from Argyle.

Some have even sounded the red alert as Argyle’s production for 1999 will be lower by 19 per cent and is likely to fall further. And as De Beers rations its Argyle-type stocks, Indian diamantaires, particularly from Surat, are facing a nightmare. Having bought smaller goods at premiums they find that the polished goods are not moving as anticipated.

Thus, margins are being squeezed and if they do not get the requisite roughs, some may even close down.Pessimists also ask as to how long Argyle will last?

Will the Indian speciality, small and cheap roughs, continue to flow from Australia even if Argyle does not opt for the underground pit? In a worst-case scenario, should Argyle close down, say by 2005-6, will it sound the death knell for the Indian cut and polished diamond industry, given that there is no alternative to Argyle in the offing?

Pacifists
But there are many in the industry who do not take an alarmist view. For them it is just a matter of perception of how bad the situation can be. They point out that alarmists have always looked at the darkside of the industry. The same industry which was collectively under despair in the post Argyle-split fall in exports was cock-a-hoop earlier in the year following record exports.

Then the same diamantaire had said, the scenario has changed completely, there is much optimism, there is hope. True, the scenario was bleak just eight months ago. At that point, it was certain that, with recession having set in, 1998 would be a bad year for the diamond industry worldwide.

However, now things have turned around for the better for the Indian diamond industry. We feel there is scope for improvement. Stocks have reduced, both in polished as well as roughs. Profitability has improved. We look forward to the next millennium with growing anticipation.

Reasons for the buoyancy and rosy predictions then, was that the industry had captured more than 50 per cent of the recession-hit world marketshare of polished exports, in value terms. If the outlook looked rosy then, the pacifists point out that most factors remain the same now as well. Combined gem and jewellery exports crossed the $6 billion mark during 1998-99, and the trend continues, with export of cut and polished diamonds showing a 24.69 per cent increase ($3,065 million) in the April-September period of 1999 over 1998. Even CSO sales during the first half of 1999 rose by 43.9 per cent to $2,447 million. At least in the medium term (next couple of years), they believe that the industry will reap the benefits of the millennium event.

Moreover, in 1998-99, a period when Indian exports languished with a 1 per cent growth rate, this industry posted a healthy 12 per cent growth. The way this growth came about (there was an 11 per cent fall in Israel’s diamond exports) shows that Indian diamantaires were getting aggressive in the global arena. And given that the Central Selling Organisation (CSO) rough sales had also declined by about 28 per cent during 1998, the performance was indeed noteworthy.

The success story was all the more sweet given the horrifying experiences immediately after the Argyle split with the CSO. For the first time since 1990-91, exports in cut and polished diamonds had declined by 9.16 per cent to $4.23 billion in 1996-97. Bad news to digest for an industry which had seen heady days of a 26 per cent export growth during 1993-94 even when the industry had been hit by recession.

The situation worsened further in the first quarter of 1997-98 (April-June), when imports exceeded exports. And in the first nine months of 1997, imports increased by 20 per cent whereas exports fell by 4 per cent. No wonder, the Indian diamond industry then sent out an SOS, just as it is doing now.

Recovery
So, how did the Indian diamond industry achieve the amazing turnaround last year? That too in dollar terms? Two important reasons, apart from the resilience and entrepreneurship of the Indian diamantaire.

First, thanks to global recession, the much anticipated and feared price war in Indian-type goods did not take place. After flexing its muscles and making pronouncements about branding and the two-tier system of marketing roughs, De Beers finally paid heed to the call by the World Federation of Diamond Bourses and processing centres like India. Both communities had been clamouring that profitability was on the wane. Realising that the situation was fast getting out of control, CSO reduced its sights right through 1998. This year too, the increase in sight allocation has been very gradual. Only in the last two sights of the current year has the CSO increased volumes and value of goods on offer. Here too, it is the better goods that have come to India. In fact, the CSO raised prices of roughs in the cheaper variety in the September-end sight.

The reduced sights meant that CSO stocks stood at an all-time high of $4.8 million at the end of 1998. When compared to the sales figure of $3.35 billion for the year, they were 31 per cent higher. This gap had never been so wide, not even during the 1982 crisis. Even now, the figure is expected to remain high at the end of the year, as receipts from South Africa have resumed.

Thus, De Beers delivered when it mattered most. In a crunch, it came to the rescue of the trade which it has monopolised for so many decades. For this it got accolades from all in the trade, friends as well as foes. As Gem & Jewellery Export Promotion Council (GJEPC) chairman, Pravin Shankar Pandya said, De Beers co-ordinated the supply of roughs better than ever before.

Also, under a new three year contract with De Beers, the Russians have been very disciplined and there have been no leakages into Antwerp.

With demand alive only in the US and Europe to some extent, it meant that centres processing bigger goods, like Israel and Antwerp, lost their marketshare. Israel, as seen above, lost a huge 11 per cent. And though Argyle benefitted from the decline in demand for bigger stones it supplies mostly Indian-type goods there was no price war. The stagnation in Japan and the virtual hole left by the erstwhile tiger economies meant that though the trade suffered as a whole, India, in particular, prospered.

Secondly, the Indian diamantaires were lucky in that at last they had an administration which seemed to understand the needs of the trade. Some say that post-Pokhran and post-sanctions, the government had no choice but to take steps to boost exports. One of the steps taken was to lower the interest rates on pre and post-shipment credit to 9 per cent, a long-standing trade demand. Diamantaires aver that this was one of the key factors which helped India achieve growth in adverse conditions. Given the same environment, they expect the export of cut and polished diamonds to continue above the $5 billion mark.

Euphoria, but ...
In spite of the `feel good’ factor of a 50 per cent plus marketshare in value terms in cut and polished diamonds, there is still some apprehension in the industry. Expectations are high, there is hope of greater productivity and profitability. However, with it is the fear that the lure of better prospects will cause capacities to increase and even catalyse re-stocking of goods. And India could find itself, yet again, ensnared in the web of too much inventory, slow offtake and even slower collections.

Moreover, the diamond industry here is aware that it is close to saturation levels in cutting and polishing. Only an increase in global demand could see its marketshare grow. Export growth is expected to be a mere 5-10 per cent. Some pessimists expect stagnation, some a decline. And should it coincide with increased capacities, a global industry coming out of recession (and asking for bigger stones) and bigger sights, India could find itself once again with unwanted inventories.

Unless, it is able to get bigger and better quality goods consistently. There is also the certain knowledge that centres like Israel and Antwerp have always come storming back as demand improved.

The great disappointment is that while the diamond sector has done well, the jewellery segment did not register any great improvement. In fact,GJEPC’s provisional figures show a 2 per cent fall to $823 million during 1998-99 as compared to $840 million in the previous year. However, later this figure was changed to $863 million.

As such, there is a crying need for India to do well in this sector, where the potential is immense. India holds a mere 1 to 1.5 per cent of the $70 billion plus global market in jewellery. Industry sources aver that while the studded jewellery segment is doing fairly well, it is plain jewellery which is a cause for concern.

While the latest EXIM policy envisages free trade zones (FTZs), lowering of interest rates and a more friendly bureaucracy, India seems to be merely reactive. What should have been done five years ago is being attempted now.

There is also the growing threat from China as a processing and cutting centre in diamonds. Diamantaires believe that the Chinese are on the warpath, and will start squeezing the Indian diamantaires sooner or later, unless there is government backing. While the Chinese presence is small, their growth is terrifying (see page 6: Threats and opportunities).

What is even more worrisome for India is the fact that, through the joint ventures which have been set up, the Chinese would first utilise the Indian marketing expertise and then break off. Another major cause for concern is that the Chinese are also venturing into jewellery. India, with a miniscule presence in the global $70 billion industry, is even more vulnerable here. Remember, the Chinese don’t have to depend solely on import of gold. China is one of the top gold mining countries annually producing about 150 tonnes of gold.

A perspective on De Beers
Coming back to De Beers, the CSO arrangement in spite of having its ups and downs has outlasted two World Wars, Apartheid in South Africa, disintegration of the Soviet Union and even the anti-trust laws in the US (which prevents it from operating directly in the US). There is nothing that suggests it will change in the next millennium.

History bears evidence that it was much easier for De Beers to operate with a single authority in any country. Be it either the Soviet Union or an India controlled by a single party, a strong bureaucracy and no corporates to deal with. Now in the changed environment of South Africa, and with the Argyles and BHPs around, it is much tougher. It may be tempting to promote the diamond industry in an authoritarian China.

It could also help spread the basket. Remember, back in the early eighties, India rose as a processing centre (backed by De Beers) when the diamond industry faced a crisis. It was alleged then that De Beers took the step to ward off a threat posed by the banking sector coupled with the Israelis and the Americans. Will De Beers be satisfied in trying to control one major centre or risk promoting another and face the prospect of trying to control both?

Emboldened by the good performance during 1998-99, many diamantaires want sweeping policy changes to come about so as to free the industry of bureaucratic controls. They want delicensing in all aspects of the industry. Their demand is that the interest rates on export credit be brought on par with those prevalent in developing countries. A case in point being that pre and post-shipment credit should be brought down to single digits once again (the 9 per cent interest rate on credit last year did wonders for the trade). The fall back to the double-digit regime (pre-shipment rates are 10 per cent and post shipment 10-12 per cent) is incomprehensible. What is shocking the trade even more is the 20 per cent interest charge on overdue credit, higher than anywhere else. The trade believes that realistically it should not exceed 13 per cent.

Total freedom, no controls and a duty structure on par with the developing nations is what the trade wants to tackle the competition. It is believed that only then will global competition reach Indian shores and the Indian entrepreneur be able to absorb advanced technology. Also, only then can India genuinely hope to increase its marketshare in diamonds. And only then can India also hold on to its position and improve its capability to directly manufacture goods so far processed only by Israel or Antwerp.

This is even more crucial if the export effort in jewellery is to fulfil its vast potential. True, there will be some pain initially, but the rewards will be of a lasting nature.

But the threat still looms large
In the middle of all such possibilities, some factors cannot be simply ignored. The US is the single largest market for retail jewellery, a whopping 46 per cent of total sales. It is the cornerstone on which the edifice of the diamond industry has managed to survive and prosper. Particularly at a time when the other major markets showed a sharp decline. Should the US economy bubble burst (as pundits predict), the diamond industry could relive the great depression all over again. That is probably the reason for the frenzied attempts to re-discover and vitalise the Indian domestic jewellery market.

Moreover, the possibility of Argyle vanishing from the supply chain within the next decade or even less cannot be denied. With no other Argyle, there could be a sudden or gradual cut-down in production by 40 million carats. It is the volumes that matter, never mind the paltry $400 million of the global rough market of around $10 billion. It is also pertinent to note that De Beers has revised its estimate of the US retail market by 22 per cent in 1996. The US market is a pyramid with heavy growth in the lower segment. This is the segment catered to by the Argyle-type goods and cut and polished by the Indian cutters and polishers.

In the event of Argyle disappearing from the scene, will De Beers be able to retain the consumers by luring them with better goods? Or, will the consumers move over to other goods? Will the US market shrink? Who will then compensate for any decline in the US market? Where will India be placed in such an eventuality?

These questions may look far-fetched, alarmist, ill-timed and pessimistic, given the euphoria over the recovery in the industry.But the diamond will have to finds solutions to these questions sooner or later!