For background on India’s move to increase the import duty on cut and polished diamonds, read yesterday’s post.
Indians have been traditionally partial to gold, since comparatively diamonds do not provide “good returns” on investment. The lack of a transparent resale market and reliable price index are also reasons that Indian consumers prefer buying only gold.
This trend has changed of late. One reason is that prices of diamonds had gone up by almost 80% in the last three years, clearly showing that an investment in diamond was no longer a losing proposition.
However, the main reason for the Indian consumers’ new love for diamonds is the price of gold, which has been steadily climbing over the years. The government has been increasing the import duty on gold to contain an ever-widening current account deficit.
As reported by MetalMiner earlier, the Indian government has hiked import duty on the yellow metal three times this year, and the last hike took the duty on gold jewelry from 10 percent to 15. To protect domestic gold bar manufacturers, duty on bars was also raised from 8 percent to 10 percent. Keeping the festive period in mind, the government did reduce the import tariff slightly in the third week of October to bring it in line with global rates.
Upset with the high prices, a section of retail gold customers in India have started taking to buying gold ornaments studded with diamonds. It’s a win-win situation for all – less gold in the ornament means less money to be paid, and diamonds means value for money, too. Gold retailers are also happy because overall jewelry sales remain stable this festive season.
But while the government, headed into an election year, tries to resolve the social crisis of the country’s small and medium diamond polishers by mooting a hike in import duty, it may have to tackle a new problem because of the very move.
The increase in import duty on cut and polished diamonds is unlikely to affect jewelry exporters, as duty paid by them is taken back from the government through what is called as the Duty Entitlement Passbook Scheme (DEPS). But the hike will hurt local jewelry manufacturers who import cut and polished diamonds, since once the hike is put in place, this lot will have to shell out more. They will have no choice but to import rough diamonds and get them polished locally, which is perhaps what the government wants in the first place.