Managing Uncertainty- How Does the Dollar Affect the Diamond Industry in India - Essay Example

? Managing Uncertainty- How does the dollar affect the diamond industry in India Introduction For a long time,Diamond has been a common commodity traded in the Indian markets. India can be regarded as world’s largest consumer of rough diamonds; this emanates from the huge imports of diamond in India. The imports of diamond in India, in 2010 and 2011 amounted to $11 billion. The diamonds polished and exported during these two years had a value amounting to $28 billion. This implies that there is a lot of trade in Diamond, which takes place in India. In the recent past, the diamond market in India has faced some challenges, which have contributed to the reduction in the amount of diamonds that can be categorized as uncut. In 2011, the amount of uncut diamonds was 120 million carats; as compared to the 150 million carats in 2007. This decline is alarming and is an issue of concern that needs to be addressed. The impact of the dollar on the diamond market in India Based on the complicated and complex forms of uncertainties, one can conduct an analysis of the impact that the fluctuation of the dollar has had on the diamond market in the United States. Before the 1990s, the Forex system used to be fixed; however, after the 90s, the Indian government changed the system to a model based on floating rate. The purpose of the fixed rate system was to ensure that rupee fared well against other major world currencies such as Euro, Dollar, as well as GBP. Under the floating rate, the market forces can be regarded as the determinants of supply, as well as demand of the currency. In this case, there is a decline in the value of the currency when demand is less than its supply. When the supply is less than the demand of the currency, there is an increase in the value of the currency. In the recent past, India has witnessed a decline in the value of its currency (rupee) as a result of which the diamond industry has declined significantly (Mital 2008, p.24). The fluctuation in the U.S. dollar rates are also experienced because the United States can be regarded as a big consumer. This means that the amount of imports in the United States tend to exceed the amount of exports. As such, the United States makes more payments in dollars, which means that the dollar will be used more than foreign currency will be received. When there are more payments made using dollars as compared to the amount of foreign currency received, what results is a huge supply of the dollar in foreign markets. Consequently, the value of the dollar will fluctuate compared to other world currencies. This has affected the diamond industry in India, which exports some of its diamond products to the United States (Poros 2011, p.65). The other reason why the dollar has witnessed massive fluctuation is because of the huge amounts of U.S dollars in foreign markets such as India. This high amount of the currency has led to its fluctuation, thus affecting the diamond market in India, which uses the US dollar as one of the major currencies while conducting trade. The fluctuation in the value of the dollar also emanates from the huge gap created by the balance of payments deficit. Over time, the U.S dollar has weakened, thus resulting to a huge BOP deficit. The fluctuation in the value of the dollar has also resulted to the reduction in the Foreign Direct Investment in India. This has significantly affected the diamond industry in India since few people wish to invest in the country. The decline in FDI does not attract investors; rather it keeps them away, thus resulting to low investments and little trade in precious commodities such as diamond (Eskeland et al 2003, p.73). The fluctuation of the dollar has also had an impact on traders who either supply the commodity to India, or import it from India after processing. The diamond market in India has also been affected by the diamond industry in China. Whereas India uses the dollar as a primary currency, China does not highly depend on the dollar. As a result, the Indian market has faced huge challenges and immense competition from China. This competition has served to weaken the dollar and the Indian diamond market, with the Chinese currency gains more strength as compared to the dollar. China can produce cheap diamond, which is more affordable and has a larger market than the diamond produced in India. Chinese firms, which conduct business overseas, have had an opportunity to access natural resources and this has given them a competitive edge over Indian firms (Carbaugh 2010, p. 20). The fluctuation of the dollar has resulted to the shortage of diamond in Indian industries. With a low value of the dollar, there is little money with which to purchase the diamond. As a result, the amount of diamond purchased for processing by Indian industries has declined. This decline has resulted to low amounts of diamond being processed in India. This negatively affects the market; as shortage of raw materials imply that the end product will also decline. A decline in the amount of diamond processed means that revenue in diamond will decline. Consequently, the entire diamond market and Industry in India is affected negatively. As the dollar weakens, the raw materials needed to process diamond (such as unprocessed diamond) become expensive to purchase and few industries can afford to process diamond. Following the fluctuation in dollar prices, cutters of diamond are unable to purchase the amounts they used to purchase in the past (Peng, 2012). Conclusion In conclusion, the diamond industry in India has witnessed significant challenges in the recent past. This has emanated from the decline in the value of the dollar, which has weakened as compared to other leading currencies. In 2011, the amount of uncut diamonds was 120 million carats; as compared to the 150 million carats in 2007. This decline is alarming and is an issue of concern that needs to be addressed. The fluctuation in the U.S. dollar rates are also experienced because the United States can be regarded as a big consumer. The fluctuation of the dollar has resulted to the shortage of diamond in Indian industries. With a low value of the dollar, there is little money with which to purchase the diamond.   References List Carbaugh, R. J. (2011). Contemporary economics: An applications approach, Armonk, N.Y, M.E. Sharpe. P.20 Eskeland, G. S., Litvack, J. I., & Rodden, J. A. (2003). Fiscal decentralization and the challenge of hard budget constraints, Cambridge, Mass. [u.a.: MIT Press. p.73 Mital, A. (2008). Cases in strategic management, New Delhi, Tata McGraw-Hill. P.24. Poros, M. V. (2011). Modern migrations: Gujarati Indian networks in New York and London, Stanford, Calif, Stanford University Press. p.65. Peng, M. W. (2012). Global Business, 3rd ed., London, Cengage Learning. Read More