The Diamond Industry in Crisis: How Geopolitical Tensions and Market Shifts Are Reshaping the Sector

The ongoing war between Russia and Ukraine is creating ripples far beyond the immediate conflict zone, affecting industries and economies worldwide. One of the unexpected victims of this geopolitical struggle is the diamond industry in Surat, Gujarat, India. Surat, a major hub for diamond cutting and polishing, has been hit hard by Western sanctions on Russia, which have created a significant disruption in the supply chain. The sanctions, aimed at weakening Russia’s economic power and its ability to fund the war, have inadvertently thrown thousands of Surat’s diamond workers into financial turmoil. The impact has been so severe that some workers have tragically taken their own lives under the immense financial pressure.

Western sanctions on Russia include a ban on importing non-industrial diamonds mined, processed, or produced in Russia. This ban has been extended to cover imports from third countries, further exacerbating the crisis for Surat’s diamond industry. The United States, the largest market for diamonds polished in India, has been particularly stringent in enforcing these sanctions. The aim is to cripple Russia’s diamond trade, but the collateral damage is felt acutely in Surat, where nearly 90% of the world’s rough diamonds are processed. The Indian government is deeply concerned about this issue, as Russia is a crucial source of raw materials for India’s diamond industry.

Data from the Global Trade Research Initiative (GTRI) highlights a significant decline in rough diamond imports and exports in India due to these sanctions. This has led to a build-up of inventory and job losses, particularly in Surat. The downturn has been so pronounced that a major diamond manufacturing firm in Surat recently declared a 10-day ‘vacation’ for its 50,000 employees, reflecting the dire state of the industry. Factory closures and defaults are becoming increasingly common, leaving thousands of workers without jobs and pushing many into financial despair.

The challenges faced by Surat’s diamond industry are compounded by other global issues. The ongoing Israel-Palestine conflict and the general economic recession have further dampened demand for polished diamonds in international markets. Additionally, consumer preferences are shifting towards lab-grown diamonds, which are more affordable and have a smaller environmental footprint. This trend is particularly noticeable among younger consumers who have limited disposable income. Lab-grown diamonds are up to 90% cheaper than natural diamonds, making them an attractive alternative in a financially constrained market.

A report by Crisil predicts that India’s natural diamond polishing industry will see a 25-27% decrease in revenues this fiscal year, marking the third consecutive year of contraction. This decline is driven by muted demand in key markets like the US and China, as well as the increasing popularity of lab-grown diamonds. Chinese consumers are also shifting their preference towards gold, which is perceived as a safer investment during uncertain economic times. This shift is contributing to the revenue decline and putting additional pressure on an already struggling industry.

To address these challenges, the Indian government and industry leaders are taking proactive steps. The Bharat Ratnam Mega Common Facility Centre (CFC) in SEEPZ, Mumbai, is a state-of-the-art facility designed to support the gems and jewellery industry. Launched by the Minister of Commerce and Industry, Piyush Goyal, the CFC provides advanced technology and training services to help small and medium-sized enterprises (MSMEs) become more competitive. The facility is equipped with the latest technology, such as 3D printers and laser machines, and offers world-class design, manufacturing, and training services all under one roof.

High-ranking government officials, including Shri Sunil Barthwal, Commerce Secretary, and Shri Santosh Sarangi, Director General of Foreign Trade, recently visited the Bharat Ratnam Mega CFC. They praised the efforts of the Gem and Jewellery Export Promotion Council (GJEPC) in promoting exports and generating employment opportunities. The officials stressed the importance of continued collaboration to enhance the industry’s competitiveness on a global scale. The CFC is expected to boost the exports of Indian gems and jewellery and provide much-needed training and skill development opportunities to aspiring workers.

Despite these efforts, the road to recovery for Surat’s diamond industry remains challenging. The industry needs to adapt to changing market dynamics and consumer preferences. Lower working capital requirements are expected to reduce reliance on external debt and support credit profiles, but receivables remain a concern. Miners and polishers are reducing inventory and costs in response to weak demand, which will help lower working capital needs. However, the overall liquidity is expected to remain adequate, and the industry must focus on reducing its reliance on external debt to sustain itself in the long run.

The decline in revenue is significant as the diamond industry is a crucial sector for the Indian economy, providing employment to around 1 million workers, mostly in rural areas. The Indian government has implemented various policies to support and promote the diamond industry, but the current challenges are likely to impact its growth. The industry will need to find innovative solutions to overcome these challenges and sustain itself in the long run. The focus should be on improving efficiency, adopting new technologies, and exploring new markets to diversify and reduce dependency on traditional markets like the US and China.

The impact of the geopolitical tensions and market shifts on Surat’s diamond industry is a stark reminder of the interconnectedness of the global economy. Actions taken in one part of the world can have far-reaching consequences, affecting industries and livelihoods thousands of miles away. As the industry grapples with these challenges, it is essential to strike a balance between implementing necessary sanctions and minimizing collateral damage to innocent workers and businesses. The situation calls for a nuanced approach that considers the broader implications of geopolitical actions on global supply chains and local economies.

In conclusion, the diamond industry in Surat is facing an unprecedented crisis due to a combination of geopolitical tensions, market shifts, and changing consumer preferences. The sanctions on Russia, aimed at weakening its economic power, have inadvertently affected thousands of workers in Surat, leading to job losses and financial despair. The rise of lab-grown diamonds and shifting consumer preferences are further exacerbating the situation. While efforts like the Bharat Ratnam Mega CFC offer some hope, the industry needs to adapt and innovate to survive. The focus should be on improving efficiency, adopting new technologies, and exploring new markets to ensure long-term sustainability. The interconnectedness of the global economy means that actions taken in one part of the world can have far-reaching consequences, and it is crucial to consider these broader implications when implementing policies and sanctions.

The diamond industry is at a crossroads, and the path forward will require resilience, innovation, and collaboration. Industry leaders, policymakers, and stakeholders must work together to navigate these challenging times and find sustainable solutions. The future of Surat’s diamond industry depends on its ability to adapt to changing market dynamics, embrace new technologies, and explore new opportunities. With the right strategies and support, the industry can overcome these challenges and continue to shine on the global stage.