The recent decision by the U.S. administration, spearheaded by President Donald Trump, to implement an additional 10% tax on natural diamonds has sent ripples through India’s diamond industry. This new tariff is set to impact approximately one-third of India’s diamond exports, further straining the already fragile market conditions. According to a report from Crisil Ratings, Indian diamantaires face an uphill battle as they grapple with decreased demand and fierce competition from lab-grown diamonds (LGDs). Projections indicate that export revenues could plummet by 8-10% in fiscal year 2026.

Challenges for Indian Diamantaires

Crisil’s analysis of 43 key players in the diamond sector, which collectively represent about 25% of the industry’s revenue, sheds light on the challenges ahead. The findings suggest that while the tariffs pose significant risks, effective inventory management may help mitigate the decline in revenue and protect profit margins.

• Projected revenue decline: 8-10% in FY26.
• Impact on industry players: Potential erosion of financial stability.

Despite these challenges, Crisil noted that strategic inventory management across the diamond supply chain could bolster revenue and limit the negative effects on operating margins. This approach will be crucial for maintaining financial health amid evolving market dynamics.

Market Trends and Demand Fluctuations

In fiscal year 2025, the export of natural diamonds faced considerable obstacles due to waning demand from China and the rise of LGDs in the U.S. market. Even with efforts from polishers to increase sales in the fourth quarter to counteract the tariffs, revenues from natural diamond exports fell by 17%, dropping to approximately $13.3 million.

Rahul Guha, Senior Director at Crisil Ratings, commented on the market outlook, stating, “This fiscal year, we expect natural diamond prices to recover by 3-4% due to limited inventory across the value chain. As diamantaires align their rough diamond purchases with polished diamond sales, production cuts from miners will also help stabilize prices.” However, LGDs are projected to become even more competitively priced, widening the gap between natural and lab-grown diamonds.

The Price Gap and Its Consequences

The increasing price difference between natural diamonds and LGDs could lead to a further 12-14% drop in natural diamond export volumes, marking a troubling trend of three consecutive years of declining demand. With a combined drop of 32% in the last two fiscal years, natural diamond polishers may struggle to pass on the tariff-induced price increases to their clients.

Himank Sharma, Director at Crisil Ratings, highlighted the precarious position of natural diamond polishers, noting, “Operating on thin margins of 4-5%, these polishers will find it challenging to absorb the costs stemming from the new tariffs. Retailers and miners may need to share the financial burden.” As a result, operating margins are expected to fall by 20-30 basis points, settling between 4.3-4.5% this fiscal year.

Financial Landscape and Future Projections

The credit profiles of diamantaires could experience some relief as reduced demand is likely to prompt a 5-7% cut in inventory levels, following a previous decline of 10-15% last fiscal year. This reduction in inventory will lessen the reliance on debt-funded working capital, although outstanding receivables from export customers will require close monitoring given the current geopolitical climate and global market uncertainties.

Crisil predicts that the financial leverage of diamantaires—measured as total outside liabilities to adjusted net worth—will stabilize around 0.8 times, while interest coverage remains at approximately 2.5 times this fiscal year.

Looking Ahead

Crisil’s report emphasizes that key factors to watch in the diamond sector include declining demand for natural diamonds in major markets, increasing competition from LGDs, potential tariff adjustments, and escalating geopolitical tensions. As the landscape evolves, the resilience and adaptability of Indian diamantaires will be put to the test in navigating these turbulent waters.