The Indian Diamond Industry: Giving Credit Where Credit is DueDecember 21, 15
IDEX India managing director Yaron Barzilay caught up with Russell Mehta, the recently elected vice chairman of the Gem and Jewelry Export Promotion Council (GJEPC), and CEO of Rosy Blue (India), and asked him about the current challenging conditions in the Indian diamond industry.
Yaron Barzilay: What is the most significant challenge that the Indian industry faces today?
Russell Mehta: The single biggest challenge is the ‘ease of doing business’ and therefore the interface with the Indian government. There are a lot of compliance and tax issues that have come up and members complain that bureaucrats interpret the laws differently, leading to companies paying higher taxes in some cases and enter in to costly and drawn-out litigation with the government.
A principle exists that we should not be exporting the tax. We are paying service tax for which we need a refund, and it is frequently painful to deal with the tax authorities. Prime Minister Modi and his government are trying to make India a more efficient and easier place to do business, through the “Make in India” campaign, for example. I’m hopeful things will change, but we have issues dealing with the government on a regular basis. This is the prime focus of the Council at the moment; [we want to] expedite things so that they become easier and smoother.
The council’s job is to work with the government to improve its policies toward the industry and [to create] a ‘fair’ tax regime that is more objective. We know that we have to contribute to the running of the government, but how taxes are collected needs to be more objective, rather than down to the interpretation of individual tax officers.
One of the council’s main agendas is working on securing a “Presumptive Tax” regime – like the shipping industry in India. That tax is not based on the income of the ship (freight), but is based on the volume of the vessel, so the tax is fixed, certain and objective. If you have a 200-ton ship, the government is not bothered whether you made $2 million or $200,000, the tax is not calculated according to your profit; it is much more objective.
It could be the same in the diamond industry – the government could agree to collect say 0.50 percent to 0.75 percent of my turnover, irrespective of what my profit is. The government does not need to know what my closing stock is, nor the price I sold a particular diamond for – or why I sold it for that amount. Every diamond is unique, and the number of parcels I sell and their contents varies from customer to customer. There are so many permutations in how we sell diamonds. We have serious challenges explaining pricing, mix-ins and mix-outs and valuation of our inventory to tax authorities.
This effort has continued for a few years and the government appointed an expert committee and the task forces have said that a presumptive tax is the most efficient way of collecting taxes from the diamond industry.
YB: The Indian diamond industry has been hit hard by several issues including undisclosed diamonds, even fraud and GIA hacking. Why is so much of this going on in India and what can the GJEPC do about it?
RM: As you know, India is the largest cutting and polishing center in the world employing hundreds of thousands of people and thousands of companies. Around 14 out of 15 stones are cut and polished in India. So unfortunately the ‘bad apples’ are in absolute numbers, even if in the percentage of such ethically and morally corrupt people may be same or lower in than the other centers. I will say though that in India, we put things into the open and perspective, and are vocal about it. I do not know if in other parts of the world such ethical issues (frauds) crop up and is just kept quiet. We have demonstrated such openness when it comes to undisclosed mixing of synthetics also. We need to give credit to India where it is due that we do not push such issues under the carpet and are vocal about it so that we can find solutions.
With regard to unethical issues, we are doing what we can; in some instances the paper trail is missing – so it is hard to establish guilt. But, in one case we acted on circumstantial evidence, which allowed us to ban traders from the bourse as we were convinced that they behaved improperly.
YB: Is that attitude firmer today than in the past?
RM: I think that we have always been firm. Ethics regarding the mixing of synthetics with natural diamonds is non-negotiable. With regard to the fraud with GIA, everyone within the GJEPC and the BDB is unanimous – the guilty need to be punished.
Around 20-30 years ago the diamond trade was a smaller, closed-door kind of club. Everyone knew everybody and their family background. Over time many more people outside of the closed community have joined the trade and therefore, it is now difficult to know everyone and their background. Things are tough, business is very difficult and people are trying to make money with any means available I guess. They have their compulsions and they might be tempted to take a short cut.
This is not unique to diamonds, as it is there in any business. The ethical and moral fiber of the world has declined, because money has become so important and people are not interested in the way it is made. I do not think it is fair or right to say “Why only India?” I can count numbers of western businesses like Enron, Worldcom, VW, Tesco, which have all accepted wrong doings.
YB: The Bharat Diamond Bourse (BDB) decided to ban lab-grown diamonds completely from its entire premises, is that a real solution?
RB: That is a difficult question to answer. I have my own personal views but I have to go with what my members want and have voted for, and not necessarily what I think or believe. My personal belief is that if there is proper disclosure and business is being performed in a moral, clean and ethical way, we should let the final consumer decide what he or she prefers or would like to buy. The customer has a choice. Who am I to decide what he wants. The customer decides what is good for him.
It’s one more product on the market. The market will at some point settle down and there might be two separate markets – one for synthetic stones and another for natural stones. Customers’ likes, dislikes and beliefs will eventually drive the market.
As a natural diamond dealer I am not sure that I have to take a stand and say that synthetic diamonds must not be sold. They have a right to access the market, as long as they are ethical and they are not mixing with natural stones. If dealers want to set up shops and sell jewelry it is their business. It is already a reality and the natural diamond will have to learn to live together with synthetic diamonds. Segregated pipelines are necessary, however, so that my customer, who has been promised a natural diamond, receives what has been agreed upon and what he is paying for.
YB: Lab-grown producers are not sitting still and are innovating all the time, what does the industry need to do to meet the challenge?
RB: Only time will tell what will happen. I am concerned by the fact that the technology to make synthetic diamonds is improving faster than the technology to detect these stones, especially in the very small diamonds. I try to push various platforms like the GIA, De Beers (IIDGR) and others who have the finest R&D facilities and capabilities to come together to produce better detecting machines for the lowest possible price and the quickest possible turnaround.
Ashish Kantilal Mehta (of Kantilal Chhotalal), convener of the Natural Diamond Monitoring Committee coined it very nicely when he said that the dream is to have a machine that is like a weighing scale next to everybody; you put a diamond in and the machine makes an immediate assessment. Or if you have lots of -2s or -1s, within a few minutes you can sort the synthetic and natural stones.
The GJEPC has written letter to GIA, De Beers and ALROSA together to bring out a much faster solution. We will lose the battle if we are not able to come out with this very fast, very cheap and very efficient technology. At the end we want a sealed bag to send to our clients with a guarantee that the contents are natural diamonds. Right now it is difficult with very small diamonds – separating them is almost impossible. (We are able to say that a parcel of smalls has synthetics or not, but separating technology is not available to do mass screening stone by stone).
YB: What efforts for diamond promotion are under way or in the pipeline at GJEPC?
RM: We had a discussion in the Council – and everyone feels the need to do some generic advertising. I was disappointed with the amount of money that the Diamond Producers Association was given [$6 million], but it is a start. Hopefully they will do something. As a council, as a bourse, as a trade in India we also need to play our part. We have discussed if there is any way that we can come up with a budget from the diamond dealers in India, which we can combine with the mining companies or DPA to do projects together and do generic advertising to promote diamonds. We are not sure what we are doing yet, but there is broad agreement and support that this is a positive step. It will take at least another two months until we work out how much money we need to collect and how to actually collect it. We’ll request that the Indian government contribute as well.
We want to promote diamonds, not just India. For arguments sake, let’s say that we collected $2 million. As a Council we could then approach De Beers, ALROSA or whoever and say, “this is what we have managed to collect, would you be prepared to put in an additional $4 million?” One could argue that $6 million is not that much, but we could target VVS diamonds for example, which are not really moving – and then focus on southern India and promote these stones there (where they are popular). That money could go a long way in such a concentrated geography, but to my mind will yield great results. I have no idea how much we will be able to collect, or how much the miners are prepared to contribute. It would be good if we could at least demonstrate some (small) success and build on it.
YB: How do you see the market going?
RM: I have learned that ‘things are neither as bad nor as good as one feels it to be’. We tend to work with emotions and hence when it is bad, we start projecting it to be end of the world and when is good, we think there is no tomorrow. Perhaps this time the downturn has taken longer to repair, but something will change. The environment is constantly changing. If you look at 2008-09, the dollar was very weak (and the Fed printed a lot of money), but now it is among the strongest currencies while others are weak. There is always a cycle. There is a market for diamonds – women still like them and men would still like to propose with a diamond ring.
We as an industry need to become more disciplined and focus on margins rather than on higher turnover. In the past, people might have thought that they can sell everything that they cut and polish, but today only certain qualities and sizes of stones are selling. Every company needs to go through introspection, because the last 18 months have been very tough and management needs to ask themselves some tough questions; do you want a very large business that doesn’t make any sense or do you want a small focused business that is making money? How do you want to run your businesses? Which markets do you want to target? How much do you want to borrow against your own capital? Companies will find their own solutions. The tough times teach you more than the good times do.
I am optimistic and hopeful. Diamonds are still being sold in retail stores. We in the middle of the pipeline are having a tougher time – perhaps there are simply too many of us. There could be consolidation. But every industry goes through this. We think we are unique and that only the diamond industry has problems.
The strong companies take their discipline more seriously and take a longer-term view. The belief that the mining companies should provide some relief is antiquated. De Beers no longer controls 80+percent of the rough market, it’s “only” 35 percent and they have shareholders to whom they are accountable. We need to face up to the new realities – today there is a new normal. Bottom line, the manufacturing community should do what is good for them and their business and take tough calls to remodel their business to this new normal.
YB: Do you think that diamonds should be treated as a commodity and traded like other materials? Is it something that GJEPC would concern itself with?
RM: I often wonder whether diamonds are a commodity or not. In my opinion, diamonds sit somewhere between Art and a commodity like gold, for example. There will for sure be attempts to commoditize diamonds – but there is also a mystique, an aura and a fascination about diamonds.
We know that people are not necessarily seeing the goods [when they buy them] – they are relying on the reports and buying them as a commodity. When retailers sell, there is design, marketing, customer-attention – a lot of things come together for the end-consumer. It could become like selling a car – that one needs to take into account the design, functionality and how a person feels about a brand.
In the current climate, resale values of stones are not very high. The recent sale of the “Blue Moon of Josephine” stone is like the situation with Art. You do not find many Picassos up for sale, so these types of stones will be sold for investment. When we sell 2-pointers, maybe they will hold their value in a longer run, but if a client wants to sell it back in two weeks time, what price will they be given? Commoditization of diamonds will continue in the B2B sphere.
I do not think that the GJEPC will get into the space of selling diamonds – it is not their mandate.
I like the idea that there will still be the romance of diamonds, and that it is perhaps not the right option for the full-commoditization of diamonds.
YB: Do you think that the Bourse in Surat will go ahead?
RM: Surat is a big center and if they believe there should be a bourse there, then by all means. Bharat (Mumbai) and Surat can exist side-by-side as every center has its own strengths. Despite the current market difficulties, people are still investing money there, so if the market supports it, why not have a bourse there? I believe that there are a few new large factories being built there, so maybe it is time to invest right now, and when the business improves they will be in an ideal position to capitalize.
However, if anyone ever says that we can only have the Surat Diamond Bourse and the Bharat Diamond Bourse must close down, then that is an entirely different conversation.