India Wants $20 Billion Exports – but Figures Don’t Always Add Up
July 22, 04Anyone attending the recent jewelry exhibition in Mumbai can only stand in awe at the enormous strides made by the Indian jewelry industry in recent years. India is changing. An enormous middle-class is fast emerging in a country in which traditionally most people were living on subsistence income and few were very rich. In a country that has well over one billion people, a relatively small middle-class still provides a far greater market - in terms of people - than the entire United States of America.
The diamond and jewelry sector represents some 20% of the country’s total exports. This sector is powerful, influential and also gets strong government support. Recently, Shri Kamal Nath, India’s Minister of Commerce and Industry, called upon exporters in boom sectors such as gems and jewelry to come up with a timetable for marketing plans in order to achieve a large jump in exports from those sectors in which India has a distinct comparative advantage. The minister has pledged to extend all support to promotional plans to tap overseas markets more effectively and urges exporters to have a “futuristic vision with a long-term perspective so as to leverage their strengths as world leaders in this important segment.”
The gem and jewelry sector is among India’s leading foreign exchange earners, with exports from this sector in 2003-04 valued at $12 billion, with the United States and Canada alone accounting for 40 percent. Exports of polished diamonds amounted to $8.6 billion; the remaining part consists mostly of gold jewelry. The Gem and Jewellery Export Promotion Council (GJEPC) has set a target of $16 billion by 2007. The minister himself considers it reasonable to strive for achieving maybe $20 billion by 2007, but that is probably overly optimistic.
India seems determined to transform the country from the largest diamond manufacturing center to the world’s largest trading center for gems and jewelry. This sector envisages 500,000 additional jobs by 2007 (the present workforce is one million) and the creation of Special Economic Zones across the nation exclusively for Indian gems and jewelry.
Concentrating on the diamond figures alone, one must avoid euphoria since statistics are not always what they seem to be. In the past few years, but no longer today, companies demonstrating an export growth in excess of 25% were entitled to a 10% duty reduction for a variety of other imports. This may have led to an overstating of some exports, and thus also for rough imports, but the GJEPC itself – and that deserves recognition – asked the government to intervene and to cancel the scheme to preserve the integrity of the industry.
I am saying this to caution that if the 2003-4 polished diamond exports (at $8.6 billion) and rough imports (at $7.1 billion) are overstated by maybe as much as 30%, this will become a hard act to follow. The now discontinued export incentive scheme was used by some unscrupulous traders, very few, we understand, to export low value goods at high recorded value to the UAE. “Even if the goods are thrown into the sea, the financial benefits made it worth it,” explained one trader. In order to balance the books, invariably these few traders would import cheap rough into the UAE and then export it at high value to India. As I said, the GJEPC, when it became aware of these manipulations, which potentially could damage the good name of the industry, brought this information to the attention of the authorities. This led to the retroactive cancellation of the export incentive scheme to early 2002, something that is being contested in court.
There is another figure that raises some question marks. The added value in the Indian industry is very high, maybe 30%-50%. For the cheaper goods, the labor costs may even exceed the diamond material costs, especially when processing goods of 0.01 or 0.02 carats. When the difference between rough imports and polished exports amounts to only 20%, this is a figure that needs to be researched more. When the imports of polished diamonds worth $1.19 billion is considered, and assuming that some or most of it may well be re-exported, the added value declines significantly. The re-export of rough amounting to $534 million (more than double the amount in the previous fiscal year) also raises questions on the value added.
It is thus fair to put the 2003-4 fiscal year’s polished diamond manufacturing in India at $7.438 billion and net rough imports (available for local manufacturing) at $6.596 billion. This would suggest an added value of 12% -- which is impossible; it is much, much higher.
Therefore we tend to be cautious when talking about figures and raise some question marks concerning the minister’s high expectations. The domestic market is estimated at some $800 million, but this comes mostly from polished exports and hardly from domestic manufacturing. But even with all these caveats, the Indian figures and the activities at the trade show underscore how the Indian market is growing enormously.
One Indian trader jokingly remarked that 12 out of every 10 diamonds processed in the world are manufactured in India. When I protested that this doesn’t make sense he quickly responded: exactly, but this is India. So now we know – and nobody is laughing.