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 Economic conditions in the US and China, growing market for lab grown diamonds (LGD), other avenues for discretionary spending and geopolitical conditions is taking the glitter off the Indian cut and polished diamond (CPD) industry.

According to the credit rating agency CARE Ratings, the industry exports out of India are expected to hit a five-year low in FY24.

The exports of CPD industry will see exports dipping by 25-30 per cent to $15 to $16 billion with the near term demand continuing to be subdued and no significant recovery in FY25.

India is the world's largest centre for CPD, accounting for more than 90 to 95 per cent of the total world's polished diamond consumption.

The US and China, the primary diamond-consuming markets, together account for nearly 65 per cent of India's diamond exports.

Following the Covid-19 pandemic, a surge in diamond jewellery demand, spurred by the US economic stimulus and limited opportunities for experiential spending, propelled CPD exports to record highs in FY22 ($24.43 billion) and FY23 ($22.04 billion).

However, economic conditions in the US and China, the rise of alternative discretionary spending options, the growing market for LGD, and geopolitical tensions have negatively affected India's CPD exports which had resulted in a 28 per cent year-on-year drop to $13.04 billion in 10MFY24, driven by decreases in volume and value.

Furthermore, the impending impact of G7 sanctions on Russian-origin diamonds regarding logistic and operational challenges for Indian CPD players would remain a key monitorable, said CARE Ratings.

As per the report, in the medium-term CPD exports from India will be influenced by economic recovery in consumption markets, geopolitical landscape, and customer preference for diamond jewellery in the discretionary spending space.

The entities with prudent debtors and inventory management are expected to sail the tough tide.

Yogesh Shah, Senior Director, CARE Ratings, said: "Players operating in smaller carat diamonds (below 0.3 carats) to be better placed than entities dealing in certified diamonds, as smaller carat diamonds have witnessed lower price erosion and limited impact of LGD diamonds."

Further, the demand-supply imbalance has pressured the pricing of polished diamonds, leading to a price correction estimated at 5-10 per cent for diamonds below 0.3 carats, 20-30 per cent for 0.3 to 3 carat diamonds, and 10-20 per cent for diamonds above 3 carats in CY23. This imbalance and price correction have adversely affected the export value.

On the supply front, G7 nations have announced sanctions on Russian-origin diamonds to be implemented in three phases from January 2024 to September 2024.

Going forward, to ensure the traceability of diamonds for diamonds of 0.5 carats and above, a centralised, technology-based tracking system from the point of rough diamond exports in the country of origin to the store could be established.

This could have compliance and supply-side challenges for Indian CPD players, CARE Ratings report notes.

To curb the losses and focus on liquidating inventory holding, the Indian entities self-imposed suspension of rough diamond imports for two months (October 15, 2023-December 15, 2023).

While the restricted import of rough diamonds helped streamline inventory levels to an extent, the reduction in rough diamond prices by DeBeers at its first sight for CY24 is expected to address the disparity between rough and CPD prices going forward.