Indian Gems and Jewelry Trades Still Feeling Shockwaves from Demonetization

A month after the sudden announcement by the Indian government that it was withdrawing 500 and 1,000 rupee notes as part of a battle against corruption, the shockwaves are still being felt by the country's diamond industry from the so-called demonetization.

Around 85-90 percent of the world's rough diamonds end up in India for cutting and polishing. Those goods are usually bought in cash and then sold on credit by several thousand companies in the sub-continent.

Cash is king, and it is the oxygen that is vital for the Indian gems and jewelry business all the way from small plants in Surat to the major retailers.

Anecdotal evidence appears to show that there has been a drop of around half in the number of visitors and buyers to jewelry retailers in India since panic set in after the demonetization. And since India is the world's third-largest diamond consumer, a decline in domestic demand is certain to have effect on the global trade as well.

Diamond polishing businesses are being hit hardest since they have the lowest operating margins in the business, meaning that Prime Minister Narendra Modi's demonetization campaign is hurting the gems and jewelry trade at the most vulnerable part of the pipeline. And that is ironic given his publicly stated support for an industry that brings in huge amounts of much-needed foreign currency.

Many of those firms are already hurting from lower demand, particularly due to a slowdown in China and polished prices which have been static, though there have been slight rises in recent weeks. With payments from customers delayed, paying salries and other expenses is becoming difficult.

And it's not as if the cutters and polishing companies can rely on volume to make up for the losses. Demand has been little changed for the past several years, and predictions by De Beers are that revenues this year for the global diamond jewelry sector will come in at the 2013 level of $79 billion.

And it is not just Indian diamantaires who have been hit: gemstone miner Gemfields Plc, the world's largest producer of rubies and emeralds, as well as other precious gemstones, last week announced that it would delay its December auction of mostly higher-quality emeralds to February. The reason? Indian gemstone manufacturers and exporters – who play a critical role at such sales – have been hit by demonetization.

All of which has created an uncertain outlook for much of the Indian gems and jewelry industry as we approach the new year.