Mumbai/New Delhi:It was supposed to add sparkle to India’s more than $300-billion export sector. But the gems and jewelry industry is doing quite the opposite—making it look dull.

Gems and jewelry exports fell 16.6% from a year ago to $3.4 billion in March, the second straight month of contraction that acted as a drag on overall exports, according to commerce ministry data released on Friday. That has pushed India’s trade deficit deep into the red and given more ammunition to rupee bears, who have driven the currency to a five-month low.

The trade deficit was at $13.7 billion in March, climbing from $12 billion in February. That’s also more than the $12.3 billion deficit median estimate of 25 economists surveyed by Bloomberg.

Key points

The decline in gems and jewelry exports is seen as a fallout of a $2 billion bank fraud uncovered in February at India’s state-owned Punjab National Bank. Diamond tycoon Nirav Modi and his uncle Mehul Choksi are accused by the bank of defrauding it by using fake guarantees to obtain loans from abroad.

That scandal threatens to stymie the borrowing firepower of the nation’s jewelers, who are involved in cutting or polishing 12 out of 14 diamonds sold in the world.

“After the scams there would be an element of repedation in the industry," said Biswajit Dhar, a professor at the New Delhi-based Jawaharlal Nehru University, adding that the two things that drive India’s exports are gems and jewelry, and petroleum. “This is the lifeline of exports."

A widening trade gap will put pressure on India’s current account gap, which stood at $13.5 billion, or 2% of GDP, in October-December 2017, from $8 billion a year earlier. Foreign investments into stocks and bonds have also been slowing, raising the risk of a worsening external account.

Exports of gems and jewelry stood at around $41.5 billion in the year ended 31 March, lower than the $43 billion in the previous financial year. Analysts say the bank fraud has hit the sector hard, even as it was bouncing back from a chaotic implementation of the consumption tax in July last year.

Going forward, the pace of exports of gems and jewelry would take cue from the availability of funding in the aftermath of the bank fraud as well as global demand, Aditi Nayar, principal economist at ICRA Ltd., wrote in a note last month.

And that doesn’t look too good for Indian exports amid the rising threat of protectionism.

“Some kind of tariff war has begun," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd. in Mumbai, adding that exporters’ sentiment is also low currently. “Putting all these factors together exports will continue to show deceleration." Bloomberg.