A Diamond Under Pressure, How U.S. Tariffs are Threatening the Heart of India’s Gems and Jewellery Industry

A Diamond Under Pressure, How U.S. Tariffs are Threatening the Heart of India’s Gems and Jewellery Industry

For nearly five decades, a sophisticated and highly specialized trade relationship has flourished between Indian artisans and the American consumer. India, the world’s undisputed leader in cutting and polishing diamonds, processing over 90% of the world’s gems by volume, has found its most valuable partner in the United States, which consumes nearly half of the global diamond jewellery market. This symbiotic relationship, built on decades of trust and intricate supply chains, has now been thrown into disarray. The imposition of staggering new tariffs by the U.S.—a 50% import duty on cut and polished diamonds and a 50.57% duty on studded and non-studded jewellery—has delivered a seismic shock to one of India’s key export sectors. This is not merely a trade dispute; it is a full-blown crisis that threatens the livelihoods of hundreds of thousands of skilled workers and jeopardizes the survival of the small and medium enterprises that form the backbone of this glittering industry.

The Stakes: Understanding the Scale of the Sector

To comprehend the gravity of the situation, one must first appreciate the monumental scale and importance of India’s gems and jewellery sector. In the fiscal year 2024-25, the industry exported diamonds worth a colossal $46,000 crore (approximately $55 billion USD) and studded gold jewellery worth $23,000 crore (approximately $27.5 billion USD). The United States is the single largest importer, accounting for a critical portion of this revenue.

Beyond the numbers, the sector is a massive employment generator. The cut and polished diamond industry alone employs 8.2 lakh (820,000) skilled workers, whose expertise is the result of generations of knowledge passed down through families in hubs like Surat (Gujarat), Mumbai (Maharashtra), and Jaipur (Rajasthan). These are not easily replaceable jobs; they represent a unique human capital asset. The Gem and Jewellery Export Promotion Council (GJEPC) predicts that the U.S. tariffs could directly impact the jobs of 1.7 lakh (170,000) skilled workers. The human cost of this trade barrier is therefore immense, with the states of Gujarat, Rajasthan, and Maharashtra expected to be the worst hit.

Perhaps the most vulnerable link in this chain is the composition of the industry itself. An overwhelming 85% of India’s gem and jewellery exporters are Medium and Small Scale Enterprises (MSMEs). These are family-run businesses and small units that have invested years, sometimes generations, to build their reputation and technical capability. Unlike large corporate exporters with deep financial reserves and the ability to diversify markets quickly, these MSMEs operate on thin margins and lack the financial cushion to absorb a sudden loss of their primary market. For them, the U.S. tariffs are an existential threat.

The Immediate Fallout: An Industry in Shock

The tariffs have effectively priced Indian diamonds and jewellery out of the American market. A 50% increase in cost is unsustainable for any product, especially one as price-sensitive as jewellery. The immediate consequence has been a virtual freeze on new orders from U.S. buyers. This has created a domino effect through the supply chain:

1. Inventory Pile-up: Finished goods intended for the U.S. market are now stuck in warehouses, unable to be shipped.

2. Working Capital Lock-in: MSMEs have their precious working capital locked up in this unsold inventory, comprising expensive raw materials like gold, diamonds, and gemstones.

3. Idle Capacity: Manufacturing units, which were operating at near-full capacity to meet U.S. demand, are now facing a dramatic under-utilization of their machinery and workforce.

This disruption has upset a trade ecosystem that was “well-set” for half a century. The industry is not asking for a permanent handout but is urgently seeking short-term government intervention to absorb the initial shock and provide a bridge to adapt to the new reality.

The Lifeline: Policy Reliefs Sought by the Industry

The industry, through the GJEPC, has proposed a series of targeted, short-term policy measures designed to provide immediate relief for a period of three to six months. These measures are pragmatic and aim to address specific pain points:

• Extending the Export Obligation Period: This is a critical demand. Currently, when a manufacturer imports gold duty-free for producing export jewellery, they are obligated to export the finished product within 90 days. Failure to do so attracts a hefty 6% import duty and 3% GST. With U.S. orders drying up, exporters cannot meet this 90-day deadline. The industry requests an extension of this period to 270 days, providing them with the breathing room to either find alternative buyers or navigate the new tariff landscape without incurring punitive domestic taxes.

• Domestic Sales by SEZs with Duty Foregone: India’s Special Economic Zones (SEZs) are enclaves designed specifically for export-oriented production. They are currently allowed to sell goods in the domestic market, but only on payment of a 20% duty on the finished product. This makes them uncompetitive against domestic manufacturers. The industry pleads for permission to sell in the domestic market with the “duty foregone” on the raw materials, making their prices viable. This would help clear unsold inventory and keep the factories running.

• Allowing Reverse Job Work in SEZs: “Reverse job work” would allow SEZ units to manufacture goods for domestic buyers (DTA – Domestic Tariff Area units). This would utilize idle machinery and, most importantly, keep skilled workers gainfully employed. It is a plea to allow these export-focused zones to temporarily pivot to serving the domestic market to survive the crisis.

Financial and Social Support: Incentives and Worker Aid

Beyond policy tweaks, the industry requires direct financial support to stay afloat:

• Monetary Incentives: Drawing parallels to the COVID-19 relief measures, the sector has requested interest subvention (subsidies) on loans, temporary subsidization of exports to the U.S. to partially offset the tariff impact, and liquidity packages to ease cash flow constraints.

• Worker-Related Benefits: With massive job losses looming, there are calls for the restructuring of personal loans for workers and their inclusion under government healthcare schemes to provide a social safety net during this turbulent period.

• Marketing Benefits: To reduce dependence on the U.S. market, exporters seek government funding to explore newer markets in Asia, the Middle East, and Europe.

The total estimated cost of this bailout package is roughly $500 crore (approximately $60 million USD), a figure the industry argues is a small price to pay to save a sector that contributes significantly to national exports and employment.

The Bigger Picture: Geopolitics and Long-Term Strategy

While the immediate focus is on survival, this crisis forces a reckoning with the long-term vulnerabilities of over-reliance on a single market. The U.S. tariffs, likely driven by a combination of protectionist trade policies and strategic economic considerations, serve as a stark warning.

The long-term strategy must involve a concerted effort to:

1. Boost Domestic Consumption: Tapping into India’s own growing luxury market can provide a more stable foundation.

2. Diversify Export Markets: Aggressively promoting Indian jewellery in emerging markets like China, the UAE, and Southeast Asia is crucial.

3. Move Up the Value Chain: Instead of being the world’s workshop, Indian brands must build global recognition for their own finished jewellery brands, capturing a larger share of the final retail price.

Conclusion: A Test of Resilience and Support

The Indian gems and jewellery sector is at a crossroads. The U.S. tariffs represent the most significant challenge it has faced in decades. The industry’s demands are not for a permanent subsidy but for a temporary lifeline—a strategic pause that allows it to regroup and reorient. The government’s response will be a critical test of its commitment to supporting the MSME sector and preserving a key source of skilled employment and export revenue. The sparkle of Indian diamonds is undeniable; the question now is whether the ecosystem that cuts and polishes them will be given the support it needs to weather this storm and emerge more resilient and diversified than before. The future of hundreds of thousands of livelihoods and a flagship export industry hangs in the balance.

Q&A Section

Q1: Why are the new U.S. tariffs so damaging to Indian exporters compared to large tariffs in other sectors?
A1: The tariffs are exceptionally damaging due to the nature of the product and the market structure. Diamonds and gold jewellery are high-value, price-sensitive luxury goods. A 50% price increase makes them uncompetitive overnight. Furthermore, the Indian industry is dominated by MSMEs (85% of exporters) that operate on thin margins and lack the financial resilience of large corporations to absorb such a massive cost shock or quickly shift to new markets. This combination of product sensitivity and exporter vulnerability creates a perfect storm.

Q2: What is the “export obligation period,” and why is extending it to 270 days so important?
A2: The export obligation period is the time limit given to manufacturers who import raw materials (like gold) duty-free. They must export the finished jewellery made from these materials within this period (currently 90 days) to avoid paying the import duty and GST. With U.S. orders cancelled due to the tariff, exporters cannot meet this deadline. Extending the period to 270 days is vital because it prevents them from being hit with massive tax penalties on inventory they cannot sell, giving them crucial time to find new buyers or adjust their business plans without facing financial ruin.

Q3: How would allowing SEZs to sell in the domestic market with “duty foregone” help?
A3: Currently, SEZs can sell domestically but must pay a 20% duty on the finished product, making them more expensive than domestic competitors. “Duty foregone” means they would only pay the applicable GST, but not the import duty on the raw materials they initially brought in. This would make their prices competitive in the domestic market, allowing them to sell their U.S.-bound inventory, generate revenue, clear blocked capital, and keep their operations running. It’s a temporary measure to utilize idle stock and capacity.

Q4: The article mentions “reverse job work.” What does this mean in practice?
A4: In practice, “reverse job work” would allow a manufacturing unit within a Special Economic Zone (SEZ)—which is legally considered foreign territory for trade—to accept raw materials from a domestic Indian buyer and manufacture jewellery for them. Normally, SEZs only work for export. This change would let these specialized units use their idle machinery and skilled workers to serve Indian clients, ensuring continued production and employment during the export downturn. It’s a flexible solution to keep the workshops active.

Q5: Is a government bailout of around $500 crore justified for this sector?
A5: Proponents argue it is strongly justified based on the sector’s disproportionate contribution to the economy. The sector employs over 800,000 skilled workers, generates tens of billions in export revenue, and is primarily composed of MSMEs that are the backbone of manufacturing. The cost of inaction—widespread job losses, factory closures, and a permanent loss of export capacity—would far exceed the $500 crore relief package. The bailout is framed not as a gift but as a strategic investment to preserve a critical national asset and allow it time to adapt to a sudden, external shock.