Diamond scandal hurts Indian economy in slowdown's grip

By Swansy Afonso and Anirban Nag

When Avdhesh Pandey reported for work five months ago at one of the thousands of diamond polishing factories in India’s sprawling western city of Surat, he found the doors were locked. The owner had fled overnight without informing his 40 workers.

“The owner shut shop without paying us our monthly salary,” 33-year-old Pandey said in an interview at the home of a labor union colleague, taking a short break from another fruitless day of job hunting. Having lost his monthly income of 22,000 rupees ($310), Pandey said he’s “been roaming the streets in the past month and more trying to get another job. I leave in the morning and come back home in the evening. But no luck.”

Pandey is a victim of a severe slump that’s taken hold in India’s gems and jewelry industry, a key sector of the economy employing almost 5 million workers and contributing about 7% of India’s gross domestic product and 15% of exports.

It’s the latest pillar of the economy to wobble, as a funding crisis at home hurts everyone from carmakers to retailers. For the gems industry though, it’s been made worse by an alleged $2 billion fraud involving diamond mogul Nirav Modi. Banks have been scared off from lending to jewelers after the scandal broke, with credit to the sector down 14% in October from March 2018, around the time the Modi fraud was discovered.​

​“I have seen a lot of slowdowns in my more than 40-year career in the diamond industry,” Babubhai Kathiriya, president of the Surat Diamond Association, said in an interview at his office in the heart of the diamond polishing hub. “The last time it was severe was in 2008 but conditions had normalized after a couple of months. But this time the slowdown has dragged on for seven to eight months now and has hurt our business.”

Surat is India’s polishing hub, handling 14 out of the 15 rough diamonds mined in the world by producers like De Beers and Alrosa PJSC. Located in Prime Minister Narendra Modi’s home province of Gujarat, the city is 3.5 hours train journey from the financial capital Mumbai. Also known for its textile and real estate sectors, Surat’s diamond industry clearly dominates in the city, with huge jewelry billboards towering outside the main railway station.

The city is home to about 1-1.5 million workers in the sector, including skilled artisans like Pandey, who migrated to Surat like many others in search of better incomes. The city has about 5,000 big and small polishing units, ranging from those that employ hundreds of workers to those with just a handful of polishers.

India’s imports of rough diamonds are down 22% in the first seven months of the fiscal year started April compared with the same period a year ago, and polished diamond exports have declined 18%, according to data from the Gem & Jewellery Export Promotion Council. In Surat, employment in the gems industry has fallen and incomes for skilled artisans are down by more than 70%, according to local industry chambers.

That’s contributed to overall exports contracting in five of the past six months, pushing down GDP growth to a six-year low of 4.5% last quarter.

The scandal surrounding Nirav Modi -- who isn’t related to the prime minister -- looms over the industry. He is alleged to have used fake guarantees from Punjab National Bank to solicit loans.

“Because of these certain companies that do unethical practices, the banks have all of a sudden said that we don’t want to give credit to the diamond industry,” said Chirag Virani, a second generation director at B. Virani & Co., a diamond cutting and polishing company in Surat.

The trade war between China and the U.S. has also put a dampener on sales, Virani said.

While the U.S. is the biggest consumer of Indian diamonds, a lot of the stones are exported via China, for jewelry manufacturing or wholesale trading. With the U.S cutting its purchases of Chinese goods, the Indian gem industry has felt the impact.

Back in Surat, Pandey has to rely on the generosity of his friends to pay the 4,000 rupees rent for his one-room house and school fees for his two children. After 19 years in Surat, he says he’s now considering returning to his village in the northern province of Uttar Pradesh to work as a farm laborer.

“I am so stressed right now,” he said. “If this environment continues, then I will have to consider leaving the industry.”