Gem & Jewelry Exports To The U.S. Could Help Dent India’s Trade Deficit

India’s economy is currently on a roll. While many other nations struggled to climb out of the trough of the global recession, India’s GDP expanded 8.9 percent over the second and third quarters of 2010. And led by the gem and jewelry industry, its star performer, the country’s exports also grew strongly. Net gem and jewelry exports for the nine-month period from April to December last year were $26.72 billion, with loose polished diamond exports alone accounting for $18.93 billion.

But just like the U.S., India too is struggling with a huge trade deficit, projected at $135 billion for fiscal 2010-11 — the third largest merchandise trade deficit after the U.S. and the UK. The high cost of energy is the single largest reason for this. At 2.2 million barrels a day, oil accounts for about 30 percent of India’s total energy consumption. India imports about 70 percent of its oil, and despite having some of the world’s largest coal deposits, the country also imports some 10 percent of its coal requirements. Thermal coal imports alone in calendar 2010 have been pegged in the region of 60 million tonnes.

Adding to this is a heightened consumption culture that includes overseas holidays. Already, the Indian luxury market is estimated at $3.5 billion, with some analysts saying that given the right conditions this could jump to $30 billion in five years, riding on the aspirations of a 400 million consumer class with disposable incomes. India’s population of dollar millionaires is estimated at around 100,000 and growing.

So can India’s star export performer, the gem and jewelry industry, help the country dig its way out of the deficit? It seems a tall order. Current export growth has been purely one of value, with high gold and diamond prices accounting for most of the increase. Volumes remain low compared to pre-recession periods. Additionally, despite a surge in rough diamond imports, diamond processing still remains some 35 percent below peak production capacity, with no sign of resurgence. Also, the gem and jewelry industry sees its biggest growth coming not from exports but from burgeoning domestic demand. The recent surge in polished diamond imports (which are duty-free) testifies to this.

It’s not as though the Indians haven’t tried other markets. In fact they’ve been proactive in trying to penetrate the CIS countries, the Middle East - including war-torn nations like Iraq - and new markets in the Far East. Great potential all round, but nothing concrete yet. Even China is mainly a market of high end and more expensive goods.

The one steady export market, however, despite being severely depleted by the recession, has been the U.S. It still accounts for 35 percent by value of all Indian gem and jewelry exports. And while struggling with its own deficit and an uncertain economic recovery, Americans are buying more jewelry now. They’re expected to buy a lot on Valentine’s Day and a whole lot more than last year overall. America could be taking closer to 50 percent of Indian production by the end of the year. And because there is still some uncertainty, they’ve been buying very price consciously. Perfect for Indians wanting to sell small and lower diamonds — the volume goods that will also bring back a lot of lost employment in India.

Contrary to what one might think, it might be the old warhorse, the U.S., that could actually help dent the Indian deficit.