Beset by a range of problems including sometimes wafer-thin margins and lacklustre demand from established markets like the US, India's gem and jewellery exports nevertheless grew to $17 billion in calendar 2005, up 14.8 per cent from $14.8 billion the previous year. The vanguard of this growth has, as usual been loose polished diamond exports, which grew to $12.3 billion in value terms, up 19.3 per cent from $10.3 billion the previous year - a 9.74 per cent growth in volume to 487,000 carats from 443,000 carats the previous year. Coloured gemstones too registered a 15 percent growth to $222 million during this period, but significantly gold jewellery exports remained static at $3.8 billion.

While this is certainly a commendable performance, many market watchers warn that the pressures on the Indian diamond industry have not eased their grip and that a shakeout could well be on the cards in the near future. The problem has been that most of the smaller and less organised players have not recognised the fact that there is no correlation between the prices of rough and polished diamonds. While the price of polished does eventually rise, it doesn't necessarily keep pace with the rise in rough prices. The last one-and-a-half years have seen a rough price increase of around 30 per cent, while polished prices have only risen by between 15 and 20 per cent at best - except for certain hot categories like the 1.5-carat+ sizes.

This is what has led to intense pressure on margins and has already squeezed out many of the smaller players. The thin margins have prompted many to put any spare cash they might have not back into the business but rather into the Indian stock market, which has zoomed to previously unheard-of heights. Buy stocks for the medium-to-long term and you are almost guaranteed to make huge profits. In Surat, the heart of India's diamond cutting industry, the really hot field today is real estate. Real estate prices in that city have zoomed by as much as 400 per cent in the past year or so. So hot has the real estate market in Surat become that there were reports of land transactions being made on the street much the way diamonds are bought and sold by India's famous street dealers. By some estimates, almost as much as 20 per cent of the workforce - including small cutting shop owners - in Surat might be moving out of the diamond industry into either that city's booming real estate market or some sort of agriculture-based activity. This will only exacerbate the liquidity crunch.

So even though the market has shown this remarkable growth and De Beers reported that 2005 Christmas sales were better than expectations, it might not be all plain sailing ahead for the industry. Contrary to the much-publicised Christmas sales figures, the feedback from the Indian market is that demand from the US, India's largest market by far has been poor. According to market feedback, 2006 has not started off on a rosy note at all. The first month of the year is usually characterised by the presence of US buyers looking mainly for fancy shapes to fulfill Valentine's Day orders. This January, the US buyers were conspicuous by their absence - though there was a slight lift in the second week in demand for 0.5-1.5 carat marquises. The Koreans and some Israelis were the only ones active, looking for any bargains that might be had. According to many, significant movement if any is likely to take place now only around April and May.

Analysts are hopeful the situation will improve but caution that 2006 will definitely be characterised by a shakeout in the Indian diamond industry.

	Indian Diamond Exports & Imports
	January - December 2005		January - December 2004
	US $ mn	Carats mn	US $ mn	Carats mn
Polished Exports	12,334.26	48.65	10,339.69	44.33
Rough Imports	9,065.96	184.41	7,407.95	180.32
* All figures are provisional