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Indian Diamond Tax Set To Spur Diamond Trading Activity In Dubai

In mid January the Indian finance minister imposed a two percent import duty on polished diamonds. Although local industry leaders initially welcomed the move as a means to curb the unscrupulous round-tripping activities that have become well entrenched in the domestic Indian diamond dealer market, the move threatens India's pre-eminence as the leading global diamond trading hub and facilitates the shift of trading activities to other move favourable markets such as Dubai.

Elements of the lending and financing activities within Indian diamond trading markets have been traditionally dubious with debt levels and financing cycles reaching dangerous levels over the past few years. This has in part has been attributed to the 'round-tripping' of diamonds. The practice of round-tripping involves diamond firms exporting diamonds and then re-importing the same diamonds from overseas affiliates in order to fictitiously shore up balance sheets and increase turnover in order to procure additional bank financing. With a spate of high profile bankruptcies and frauds within both the global and domestic diamond industries the Indian government took swift action by imposing the two percent import duty that became effective immediately.

Although this move may bode well for the large Indian diamond manufacturers it significantly reduces the attractiveness of diamond trading activities in India and goes to the very heart of India's competitive advantage of having assured liquidity levels. With other traditional diamond trading markets facing their own challenges of late, this presents a window of opportunity for Dubai to emerge as a top-tier international diamond-trading hub. Notwithstanding the favourable legislative environment and state-of-the-art physical infrastructure, Dubai's close geographic proximity to the Indian diamond centers of Mumbai and Surat make it easy for Indian diamond firms to set-up trading affiliates in Dubai and redirect their trading activities through Dubai.

The shift in trading activity through Dubai should also spur increased diamond investment activity in the gulf as the higher trading volumes should increase awareness in broader markets, firm up liquidity levels and increase price transparency. The other point of differentiation of the Dubai diamond market is that it is formerly under the auspices of the Dubai Multi Commodities Centre (DMCC) allowing diamonds to be more closely marketed and branded as a tradable and investable commodity alongside other commodities such as gold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.