The loosening of DTC’s controls over the sale of diamond rough worldwide has drawn Mumbai into the reckoning as a diamond trading centre. If intelligently handled, this could be an opportunity for explosive growth As London cruises into the sunset after 350 years with the end of its hegemony over the distribution of diamond rough worldwide, diverse countries and cities will fight with panache for a larger share of the pie traditionally in the relentless grasp of erstwhile colonial Britain. All rough sales or sorting activity of DTC (Diamond Trading Company) will cease after 2008/09 in London.
Irreversible political realities and changing social and political equations have accelerated a process which returns mineral wealth to the producing countries and enlarges the scope for new emerging centers of excellence to fight for their place in the sun. Antwerp (Belgium) and Tel Aviv (Israel) are facing the frenzied ambitions of Dubai, India and China which are trying to hit all the right buttons for the top spot.
India’s association with diamonds goes back into the mists of time. For centuries India was the only supplier of diamonds until the stones were discovered in Brazil in 1725. Some of the world’s most famous diamonds – the Kohinoor and Hope diamonds – were mined in India. According to documents found in the archives of the Court of Directors of the East India Company, by 1684 the diamond trade was dominated by British merchants. In fact, the trade was legalized by 1655 and hence this period is taken as a benchmark for measuring London’s suzerainty over the diamond rough trade.
During this period India, Brazil and Africa supplied rough to the European cutting centers via London. But with changing political paradigms and the strenuous demands of the producing countries for greater control over their mineral wealth for the economic and social betterment of their people, London has voluntarily relinquished its hold over the diamond rough trade. This abjuration is a watershed in the diamond industry as it marks the end of London’s colonial policies.
Pragmatic Choice
Speaking from Israel, Chaim Even-Zohar, prominent industry analyst and Editor of Diamond Intelligence Briefs, notes that “London has made this decision not by choice, but by lack of choice. London had no choice in the matter and it has been pragmatic enough to accept reality.”
The chief operations officer of Rosyblue, Russel Mehta, comments matter-of-factly that “DTC did not choose this decision, it is a natural progression of reality. Every producing country has its own aspirations. Besides, the European Union of which England is a member is against monopolistic trade practices.”
The chairman of the Gem and Jewellery Export Promotion Council, Sanjay Kothari, underscores the pivotal role that DTC played “when it controlled 80 per cent of the world’s diamond market,” he says quietly. “Today the cartel is broken and DTC now controls only 45 per cent of the world’s market and the company may even shift its base from London to Botswana or South Africa.”
According to Louise Prior, Head of Downstream Communications at DTC, London, “DTC has 50: 50 JVs with the governments of Botswana and Namibia.” The company also intends to launch a new venture in collaboration with the South African government called the State Diamond Trader to facilitate its diamond business.
However, as Mehta of Rosyblue points out “even DTC’s present share of 45 per cent of the world’s diamond market is a dominant supply. But I must add that since 1999 DTC has been changing its thought processes and it has now decided to compete with other countries.”
While the diamond industry has been changing worldwide, Indian industry too has been fast-forwarding its entrepreneurial skills. Since the 1960s industry has been honing its competitive edge and the fact that 11 out of 12 diamonds sold globally are cut and polished in India has become a part of the lore.
Today India is the largest processor of diamonds in the world – in 2006 India imported diamond rough worth $8.2 billion dollars and exported polished diamonds worth $11 billion dollars. India has one million workers which is little more than 94 per cent of the global workforce, while more than 70 per cent of the world’s innovative technology which is slated for the diamond industry is sold to India. Of the 94 sightholders registered with DTC, 34 are Indian!
Mumbai is the hub of the Indian diamond industry which is the largest manufacturer of diamonds in the world. But the city now seeks to move further up the value chain and also be a trading centre which would boost the country’s economy even further and provide more avenues for growth.
Disturbing Trends
While industry has been on song for some time, there have been some disturbing trends which have threatened to snuff out some of the enthusiasm. Says Hemant Shah, convenor of GJEPC: “India had 57 per cent of the global diamond polishing business but this has now dropped to 49 per cent.
Also the diamond jewelry business will grow locally only at 3.3 per cent per annum.” To ramp up growth, industry with the aid of GJEPC, networked frantically with the finance ministry to remove the import duty on polished diamonds which could enable Mumbai to be the world’s largest diamond trading hub.
The finance minister, P Chidambaram, in a spirit of understanding and largesse, conceded the demand on May 3, ’07 to the unconcealed delight of the diamond trade. Kothari, chairman of GJEPC, remarks with the utmost satisfaction that “with this decision Mumbai will become, in the next one or two years, the world’s diamond trading hub.
Earlier when a Japanese or Australian businessman came to my office, I could show only Indian goods. But with the new tax regime I can keep the stocks of other countries as well.” Kothari believes that the abolition of the tax will leave the industry brimming with growth and create rich possibilities for greater employment.
So is Mumbai all set to be the world’s diamond trading hub in the next couple of years? Not quite. According to industry sources, it could take another ten years along with the creation of a friendly tax regime before the city is attractive as a trading hub. At the momentous Mines to Market conference which was held at Mumbai in April ’07 where prominent industry players converged and expressed their views, there was a realization that other countries like India had become stronger and consolidated their positions in the market.
But while India’s ascendancy is unquestionable Indian diamantaires like Shreyas Doshi, managing director of Shrenuj, believe that “Mumbai will never be a trading hub unless it gets diamond rough directly and has the same taxation structure as Israel. Israel has a flat tax of 1 per cent on the turnover, very much like a presumptive tax.” Also, as a smooth flow of diamond rough is crucial for the industry, some industry analysts privately believe that the Mines to Market conference was held to network with the African countries for uninterrupted supplies of diamond rough.
Gnawing Worries
The availability of diamond rough appears to be a gnawing worry for the diamond trade. Over the years India has carved a niche for itself in the manufacture of small diamonds where its skills are unrivalled. Ketan Parikh, partner in Mahendra Brothers, one of the largest diamantaires in the world, points out that “it is we Indians who showed the world that so-called industrial diamonds could be cut and polished as near gems and converted into a new class of diamond jewelry.”
But with DTC giving up its monopoly in the trade and with a large proportion of cutting and polishing being slated for the producing countries of Namibia, Botswana and South Africa (Botswana has some of the best diamonds in the world) there is likely to be less availability of rough globally, with India already experiencing an uncomfortable shortage of rough.
Further, India’s dreams of moving up the value chain may remain unfulfilled as the larger quality of diamonds may still go to Antwerp and Israel. Chaim Even-Zohar confirms this trend when he indicates that “the larger goods will be diverted to the African and other countries, while India will get only those diamonds which are below one carat.
The really large goods known as ‘specials’ which are 10.8 carats and above will be with the cutting centres of South Africa and Botswana. Russia, too, will not be able to supply large diamonds to India as recent legislation there has stated that large diamonds will stay within the country.”
India’s problems have been compounded by its unfriendly tax regime which has virtually spooked the market. The industry has worked itself up into a lather over taxes which are hindering the growth of the trade. In addition to a fairly large income tax slab of 33 per cent, numerous other taxes have made the Indian market unfriendly.
Mihir Dalal, Director operations of Hindustan Diamond Company, a 50:50 JV between De Beers and the government of India, is sharply critical of the “1.1 per cent airport tax that we have to pay when we bring in a consignment of goods into the country. In addition we pay an octroi tax and if you are buying diamonds even within the country you have to pay a vat of 1 per cent on the sale of goods.”
Mehul Choksi, the chairman of the Gitanjali Group agrees that “there are far too many invisible taxes like service tax, fringe benefit tax and VAT, with different VAT rates all over the country. Surely there should be just one rate.”
Industry sources who spoke on condition of anonymity, also cite a deep suspicion of the diamond industry and frequent harassment by income tax authorities as some of the reasons which curb the growth of the diamond trade. If the government does not reform its tax structure swiftly, the industry fears that Dubai could loom on the horizon as an attractive destination for the diamond trade. Mehta of Rosyblue says bluntly that “if we don’t have better tax structure, the first sale of diamond rough could happen in Dubai and then diamond rough trading will never come to India.”
While the diamond trade’s demands for a benign tax structure is understandable, the government may find itself in a dilemma if similar demands are raised by other corporates like IT and ITES services which are top drawer segments of industry and fuel the country’s economy.
Abysmal Infrastructure
For the financial capital of the country, Mumbai appears extraordinarily shabby when compared to tonier cities like Dubai. Kothari slams the city’s infrastructure which he considers “ a major problem for the industry. We need excellent roads, 24-hour electricity and water. There’s even an acute shortage of hotel rooms.”
Equally important is that the diamond trade needs to be housed in a central facility, not scattered across vast distances in the city as it is now. Chaim Even-Zohar remarks candidly that “the whole world is waiting for the Bharat Diamond Bourse to open! While it does seem quaint in the beginning, we can no longer climb stairs in buildings at Opera House, Mumbai.”
The Bharat Diamond Bourse is a central and fully integrated facility located at the Bandra-Kurla complex, Mumbai. The entire diamond trade is unanimous in its decision to move to the bourse which will have 600 offices when it starts functioning. Office space will range in size from 300 sq. ft to 10,000 sq. ft.
The bourse will also house banks, courier services and a post office. According to Rajiv Bhandari, managing director of De Beers, India, “once the bourse is operational it will probably be the best support system that the industry has created for itself. It is the biggest building in Asia and will bring all the services under one roof.”
Contrast Mumbai’s tattered infrastructure which often seems to be held together by just a prayer (!) with Dubai’s gleaming buildings and international facilities. Located strategically between the manufacturing center, that is India and the consumption centre, that is Europe, Dubai offers a whopping 50-year-tax holiday to the diamond trade, with incredibly smooth roads, swift transportation and a secure environment.
It has one of the fastest growing consumption markets for diamonds and most of all, sells diamonds of exquisite quality. It is also emerging as a major financial centre. According to industry sources, some Lebanese traders have already moved to Dubai and over a period of time, a large number of Belgians and Israelis are expected to have a significant presence in the city.
Despite its constraints and the fact that as Chaim Even-Zohar says, “everything in India is not happening with economic logic”, the Indian diamond industry has achieved phenomenal growth. Even-Zohar salutes the Indian diamond trade which has achieved unparalleled success in just one generation.
Mumbai, which is the headquarters of the trade, has achieved this success with little support from the state and central governments. If the city is given the proper matrix for growth, with enough political will to aid its development, Mumbai could outclass its glossy rivals and emerge as the world’s premier trading hub.