Analysis
Trade

India’s Cepa review could cut up rough for UAE diamond trade

September 4, 2024, 4:22 AM

EXMGP7 Indian women working in diamond factory — One expert told AGBI that India's diamond market is 'largely invulnerable' thanks to its 'unmatched' skilled workforce

New Delhi pushes for a review
UAE diamonds can undercut India
Dubai faces competition from Africa

Dubai’s status as a re-export hub for diamonds to India is under threat as New Delhi pushes for a review of terms it agreed in the Comprehensive Economic Partnership Agreement (Cepa) with the UAE two years ago.

India’s commerce secretary Sunil Barthwal raised concerns earlier this month about potential use of loopholes that could weaken India’s diamond sector, which contributes $16 billion to global exports.

Under current Cepa terms, cut and polished diamonds with only a 6 percent value addition in the UAE benefit from duty-free entry into India.

This contrasts sharply with India’s domestic tariff structure, where raw diamonds enter duty-free to support local cutting and polishing industries, but a 5 percent duty is levied on finished diamonds.

Megha Merani talks about trade with India on Dubai Eye radio’s breakfast show

Ajay Srivastava, founder of the Global Trade and Research Institute, warned in a report that the present Cepa arrangement undercuts domestic Indian producers who struggle to compete with zero-duty diamonds imported from Dubai.

The squeezed margins and competition from UAE suppliers could compel several Indian businesses to shut down, he says.

“An urgent review is needed,” Srivastava says, recommending that tariff concessions on imports from the UAE be revoked to protect local Indian players.

Echoing these concerns, Sabyasachi Ray, executive director of India’s diamond regulator the Gem and Jewellery Export Promotion Council, says that the government’s vigilance in strictly reviewing the rules of origin terms under the Cepa would act as an ideal foil against the market from being flooded with minimally processed zero-duty diamonds from Dubai.

“As a prevention the [Indian] government may consider increasing the value addition norms in future in case of any adverse reports,” he says.

“By strictly monitoring and enforcing the 6 percent value addition clause, the government can [also] ensure that only genuinely value-added products benefit from the Cepa's provisions.

"This would help prevent any potential harm to local manufacturers.”

However, Ray says India’s position as a global leader in diamond manufacturing, particularly in cutting and polishing, is “largely invulnerable” due to decades of “unmatched” skilled workforce in Surat, the country’s diamond-cutting export hub.

“This intricate craftsmanship cannot be easily replicated by other nations, including Dubai,” he says.

Despite mounting pressure, Sanjeev Dutta, CEO of the UAE-India Business Council and a member of the Cepa drafting committee, remains sceptical about any drastic revisions to the agreement.

He says that Dubai’s place in the global diamond supply chain offers advantages that India cannot easily replicate.

This includes its leadership in the Kimberley Process certification scheme, which ensures diamonds are conflict-free, preventing the laundering of illicit funds and the financing of terrorism through the diamond trade.

“There’s always the advantage of having a centre port, which is a neutral jurisdiction in terms of ensuring monitoring,” Dutta says.

“If everyone tries to do everything, then it becomes a bit of an issue.”

As New Delhi, which has protectionist tendencies, pushes for a review, the stakes are high for both India and the UAE.

It comes also amid scrutiny of their lucrative trade in gold, underscoring the complexity of trade relations and sector-specific impacts.

Bilateral trade: India-UAE

The UAE remains one of India’s largest trading partners, with bilateral trade nearing $85 billion in 2023.

Under the Cepa, India’s imports from the UAE included about $9 billion worth of rough diamonds, representing 62 percent of the $15 billion total imports, according to official data from the government’s Gem and Jewellery Export Promotion Council.

Conversely, India's key gem and jewellery exports to the UAE, totalling $5.77 billion in 2023, were dominated by $3.2 billion in gold jewellery and $1.97 billion in cut and polished diamonds.

Dubai, which re-exported over $38 billion in rough diamonds last year, is also seeing increased competition from African producers, a key source of rough diamonds.

A direct supply chain already exists but is limited to a few players.

“While the implications for Dubai's businesses are uncertain, India's direct access to African diamonds will likely enhance its competitive advantage in the global diamond industry,” Ray says.

“Direct trade between Africa and India would eliminate the costs associated with the intermediary routing.”

But Dutta believes that the Dubai Diamond Exchange – which hosts diamond auctions and tenders that attract traders, manufacturers, and buyers from around the world – will remain a key bridge for multilateral trade owing to its strong governance and tax benefits.

“I think the Africa-UAE-India corridor is here to remain,” Dutta says.

“I do not believe you will see an overnight change.”