It was inevitable and the Indian gem and jewellery export production industry was braced for it, and now it’s here. The United States announced that India, Brazil, Thailand, Venezuela and the Philippines, among others, would be removed from the generalized system of preferences (GSP) that hitherto ensured several categories of goods exported by these nations could be imported duty-free into the US. Jewellery from India and Thailand were among the goods that entered the US duty-free.

What this means is that US consumers will now pay 6% more for all jewellery that is made in India. Put another way, the import bill for the $2.21 billion in Indian-made jewellery that the US consumed last year would now be almost $2.34 billion. Add to this the fact that the rupee has been steadily appreciating against the dollar over the last couple of years – analysts are already saying that the rupee, which today trades at 40 to the dollar, could move up to 30 to the greenback in two years – and suddenly, the price competitiveness of Indian jewellery is under serious threat.The removal from the GSP list has its roots in an acrimonious dispute between the US and India and Brazil over farm subsidies that ended particularly nastily at the recent Potsdam negotiations. The US has long wanted the developing countries to open up their economies to farm-sector imports. Brazil and India, for their part, wanted the US to end its heavy subsidies to the farm sector before considering such a move. The agricultural issue has impeded progress in the latest round of World Trade Organisation (WTO) talks for a couple of years now. A while ago, US lawmakers decided to remove these countries from the GSP list in retribution. A formal review of the system was completed recently and it was clear that Indian jewellery was going to come off the list.

In general though, India’s economic prosperity has seen the rupee appreciate against the dollar at an annual rate of 3% between 2003 and 2006. It’s also been appreciating against other currencies. The Economist Intelligence Unit reports on Economist.com that in January-May 2007, the rupee’s value in terms of pounds, euros and yen rose by 8%, 6.9% and 11.2%, respectively. This, as the Economist notes, is inevitable and something of an enviable position to be in. The rupee can’t be shackled and kept artificially depressed. It will appreciate further.

The Indian diamond processing industry realizes that the strengthening rupee will also mean a loss of market share to other cutting centres – primarily China – as this continues. They know that they will have to become more vertically integrated and offer added value by other means in order to survive and thrive in the future.

So while the removal from the GSP list is something of a shock to the system, it is, in fact, only a precursor to further erosion of India’s price competitiveness in overseas markets. The Indian gem and jewellery export production industry will, in any case, have to change its price-competitiveness game plan as the rupee continues to strengthen. The new strategy will have to be very innovative. The Italian jewellery industry has realized that even unmatched design and quality was not enough to stop its loss of market share as its price competitiveness went out of the window.

The way I see it, the new strategy will have to do with how consumer specifications are matched. It will mean more direct communication with the end consumer and it will mean turning away from simple, high-volume mass production to more specialized batch processing for specific markets. It will all be very different.

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