Editor's Note: Protectionism or just protecting?

India's recent imposition of a 2 percent import duty on polished diamonds seems to be an unfortunate necessity.

In this day and age, the normal response would be to see such a move as an imposition on international trade. After all, we've long since learned the lessons of the havoc market protectionism can wreak on an industry or, on a larger scale, an economy. Free trade has proven itself as an effective catalyst that ultimately increases the overall volume of global business and, in the process, benefits all involved.

For background among the other major world diamond centers, the United States levies no import duty on imported diamonds, whether rough or polished. Israel's import duty is insubstantial. Belgium, while charging a substantial 21 percent internal V.A.T., has imposed no duties on diamond imports since 1998.

Individual nations that indulge in unilateral market protectionism often do so to nurture fledgling business categories that could otherwise fail in the face of overwhelming competition from foreign, more highly developed players. But the last thing India's diamond sector could be called is underdeveloped. The country promotes itself as producer of some nine out of 10 of the world's polished diamonds.

So why the tariff?

What seems to be the case is not so much a desire on the part of India's massive diamond companies to protect their potentially huge and rapidly developing domestic market, but a necessary move on the government's part to stem sleight of hand dealings believed to pose risks to the trade's overall health.

Without going into the details, since the country eliminated its import tariff on polished in 2007, companies have begun gaming the banking and credit system by re-importing and exporting goods to receive subsidizing credit on attractive terms which is then invested in non-related areas.

It goes without saying that we've seen in America recently what lax financing can do to an economy.

Of course wherever there's money to be made--and there's huge, huge money in Indian diamonds--there will be, let's say, shenanigans. So it seems that India's government has set its sights on instituting a duty that's high enough to snuff out these practices for the time being and consequently provide some tough love to this immensely important business category.

The move will, of course, rig the system so that non-Indian diamond manufacturers will face a two percent disadvantage compared to domestic firms