India has always relied on the middlemen in the trading centers of Antwerp, Tel Aviv and Dubai for its rough diamond supply to keep its polishing factories running.
Those rough goods typically come from Russia or Africa.
But China is increasingly breaking the established trade route by securing diamonds directly from African mines in which Chinese companies have a stake, Reuters reports
As a result, the value of China's net exports of polished diamonds has surged 72 percent in the past five years to $8.9 billion. India's polished output has jumped 49 percent to $14 billion during the same period.
Consequently, China's share of the global polished diamond market has tripled to 17 percent in the past decade, according to information from the United Nations, while India's share has swung between 19 and 31 percent.
During President Vladimir Putin's visit to New Delhi in December, Russia's state-run diamond monopoly Alrosa signed deals to raise direct rough diamond deliveries to 12 Indian firms.
"China is not going to displace India as the leading diamond polishing hub any time soon, but India needs to reform its archaic tax rules to make the Indian diamond polishing industry more attractive for foreign miners," said Martin Rapaport, chairman of diamond and jewelry service firm Rapaport Group.
India is now looking to create a special notified zone where companies can import rough diamonds on a consignment basis and re-export unsold ones, mirroring China's investor-friendly trading zones that avoid complicated export and import taxes.
"These are positive moves for the industry," said Mehul N. Shah, committee member of India's Bharat Diamond Bourse. "It will increase profit margins of the Indian diamond manufacturing industry and make it more competitive."
China also faces problems in securing rough diamonds, and its cutting and polishing factories are not as organized as those of India, while rising labor costs will also handicap any bid to raise its profile as a polishing center.
"The Chinese diamond polishing industry works on a contract-basis and through joint ventures," said Rapaport. "They are consistent at mass producing small stones, but lack the expertise required for bigger and finer stones."
