India’s Diamond Industry Losing Luster As Demand Wanes

India’s once glittering diamond industry is hurting from weakening demand and repercussions from the ongoing U.S.-China trade standoff.

India’s overall gems and jewelry sector employs nearly 5 million workers, contributes about 7% of India’s gross domestic product and accounts for 15% of exports. But, as with many other industries in India, it is suffering from the global economic slowdown.

The Indian diamond industry was particularly jolted by a huge fraud allegedly perpetrated by diamond manufacturer Nirav Modi, who reportedly used false documents to illegally solicit loans of at least $2 billion from Punjab National Bank almost two years ago.

Modi (no relation to Indian Prime Minister Narendra Modi) disappeared in early 2018, and the Indian government has since declared him a “fugitive economic offender.” Modi was arrested in London in March 2019, and India has been trying to extradite him. He was held at London’s Wandsworth prison, and an extradition trial was scheduled for May.

Modi’s massive scandal has dissuaded many banks in India from making loans to jewelers.

“Because of these certain companies that do unethical practices, the banks have all of a sudden said that we don’t want to give credit to the diamond industry,” said Chirag Virani, a director at B. Virani & Co., a diamond cutting and polishing firm.

India’s diamond polishing center is the western city of Surat where up to 1.5 million workers cut and polish rough diamonds from producers like De Beers and Alrosa of Russia for export. However, this year both the import of rough diamonds and exports of cut and polished diamonds have fallen 22% and 18%, respectively.

The trade impasse between the U.S. and China has worsened India’s diamond business because many of the stones are first exported to China for jewelry manufacture or wholesale trading. Typically, these products would eventually find their way to the U.S. But as the U.S. has reduced its purchases of certain Chinese goods, the Indian gem industry has suffered.

The U.S. Commerce Department recently reported imports to the U.S. of polished diamonds fell by 24% to $1.48 billion in September while imports over the first nine month from January to September dropped 13% at $15.37 billion.

“I have seen a lot of slowdowns in my more than 40-year career in the diamond industry,” said Babubhai Kathiriya, president of the Surat Diamond Association. “The last time it was severe was in 2008 but conditions had normalized after a couple of months. But this time the slowdown has dragged on for seven to eight months now and has hurt our business.”

Demand is so weak, polished diamonds valued at $7 billion are lying unsold in Indian warehouses.

Kathiriya added that the U.S. is “the world’s largest diamond market for India and [a] sharp decline of polished diamond imports there means a direct impact on [the] Surat market. This year’s Christmas season has remained dull as diamond merchants have not received orders like they did last year. We are hoping that the market will recover in 2020.”

The diamond business is demand driven, said Mehul Shah, vice chairman of Bharat Diamond Bourse, the world’s largest diamond exchange. “The biggest setback in the export has come from U.S., which is the world’s largest buyer of diamonds and jewelry.”

Shah fears things may get worse.

“The midstream segment in the industry has a huge pile up of diamond inventories waiting to be cleared,” he said. “The export deficit will increase in the coming months due to the weakness in the demand.”

India typically exports about $8 billion worth of polished diamonds to the U.S. annually.

Aniruddha Lidbide, a diamond industry analyst, warned that “there is no sign of recovery in the diamond market due to the sluggish consumer demand.”

India’s diamond sector is also facing rising competition from a newer subset of the gem industry – synthetic diamonds, or what are sometimes called “lab grown” diamonds.

“Exports of lab grown polished diamonds have increased 100% from India while that of polished natural diamonds were down 25%,” said Shashikant Shah, chairman of The Lab Grown Diamond and Jewelry Promotion Council.

Shah wants the Surat Diamond Bourse to establish a similar exchange for lab grown diamonds in Surat. The Bharat Diamond Bourse in Mumbai has banned trading of lab-grown diamonds.

“You can’t do injustice to [the] lab grown diamond industry by not allowing its members trading floor at [Bharat Bourse],” Shah said. “We are trying to convince members of [Surat Bourse] to allow trading of lab grown diamonds. The demand for lab grown diamonds is increasing and we urgently need a bourse to allow our members to trade on the floors.”

Mathur Savani, a spokesman for the Surat Bourse, said: “We [have] yet to receive any proposal from the lab grown diamond council. The [Bourse]’s decision on allowing trading in lab grown diamonds will be dependent on committee members’ views. No doubt lab grown diamond business is increasing, but we don’t want [the] natural diamond business to be affected in any way.”

Transparency Market Research reported that the global synthetic diamonds market is projected to jump from $16.04 billion in 2016 to $29.15 billion by 2025.

“The lab grown diamond business has given us a big shot in the arm in our overall diamond sales and allowed us entrée to a number of retailers we were not selling before,” said Marc Geller, of M. Geller, a wholesale diamond service firm in Chicago.

“Despite predictions by many in the mined diamond sector that prices for lab grown diamonds will decrease as technology and capacity increases, this has not been the case to date." Shah’s Council said. "While there have been price declines reported for the lab grown category many of those declines have occurred in the smaller, lower-quality goods while the prices for larger, higher-quality diamonds used in bridal have remained stable due to the fact that demand is currently outrunning supply.”

Proponents of synthetic diamonds assert that they are indistinguishable from mined diamonds and much cheaper.

“Our [lab grown] diamond sales are growing 50%-60% every year,” said Parag Agarwal, chief executive, Fiona Diamonds. “It’s impossible to discern lab diamonds from natural diamonds with the naked eye or even with an eye-loupe.”

Bakul Patel of New Diamond Era, which manufactures synthetic diamonds, said exports “to America have risen significantly.”

Bain & Co reported it cost $4,000 in 2008 to produce 1 carat of diamond in a lab – now that figure is down to $300 to $500. Lower production costs translate to lower prices to customers -- In India, lab grown diamonds cost about 25% of what a natural diamond would.

“People are buying lab diamond wedding rings,” said Krupal Shah of Pious Eco Diamonds, a lab diamond trader. “A half-carat lab diamond ring can be purchased for [$491 to $562] now, the same in natural diamond would be at least [$1,755 to $1,965].”