There is an uneasy calm in the diamond trading hub in Surat’s mini bazaar. In the past few years, business has not been good, hit by factors like demonetisation, GST, market downtrend and low prices. The raging Punjab National Bank episode is expected to create a trust deficit and push it further down, causing a crisis. This comes at a time when the diamond industry was expecting a return to profitability this year with good demand in its lucrative markets in the US and China. But the Rs 11,400-crore Nirav Modi case is expected to dent its fortunes in the near future.
The Indian diamond industry is one of the biggest in the world, even though it is totally dependent on imports. Over the past four decades, in spite of zero production of rough diamonds, India has become one of the world’s largest suppliers of cut and polished diamonds. What was once a scattered cottage industry has now developed into a large-scale enterprise led by modern technology and employing nearly 20 lakh people. Just Surat and Saurashtra, India’s diamond trade hubs, employ over 10 lakh people.
According to the Surat Diamond Association, there are more than 3,000 diamond units in the SME (small- and medium-sized enterprises) sector, besides several micro units and about 1,000 large units. Looking at the number of units and the size of the industry, the government has cleared the setting up of an international diamond exchange in Surat by October 2020 at a cost of Rs 2,400 crore. The exchange is expected to bring together the unorganised and fragmented diamond industry.
According to the Gems and Jewellery Export Promotion Council (GJEPC), India processes one billion pieces of diamonds, which translates to $23 billion in value terms. Currently, India manufactures over 65 per cent of the world’s polished diamonds in value terms, 85 per cent in volume and 92 per cent in number of pieces. Of every 15 diamonds set in jewellery worldwide, 14 are processed in India. Of the total diamonds cut and polished in India, 94 per cent—that’s 75 per cent of the world’s polished diamonds—are exported to global markets like the US, China and Belgium.
Today, 12 out 14 diamonds sold in the world are either cut or polished in India. Exports of cut and polished diamonds grew by 10.24 per cent from last to this year. Gem and jewellery exports from India were worth $43 billion in FY 2016-17. Within this, exports of cut and polished diamonds stood at $22.78 billion, registering a compound annual growth rate (CAGR) of 6.13 per cent. During April-December 2017 alone, India exported $17.2 billion worth of cut and polished diamonds.
A jewellery showroom in Mumbai during a recent raid
Most scams involve the larger players, who can access bank loans easily, while the smaller ones are left high and dry.
“Domestic market is showing good recovery and exports markets have shown good growth,” says Sanjay Kothari, former chairman of the GJEPC. “Looking at the growth in January, 2018 should be good as US market sales have improved by 4-5 per cent. The China market, one of our biggest, is also showing decent growth.”
Indian banks continue to provide financing as the government supports cutting and polishing. Cutters and polishers have easy access to debt as over the years, several banks have increased their exposure to the diamond industry. While the achievements of the industry are commendable, what is under scrutiny of the authorities is the way the industry functions. Despite its impressive numbers, the industry is largely unorganised.
Another issue is the practice of over-valuation and over-invoicing of the transaction value of diamonds to divert bank loans for purposes other than diamond trade—also a reason for the ongoing Punjab National Bank crisis. The problem, say diamond industry experts, is that nobody is sure of the valuation of diamonds and every trader values it differently. On top of that, banks are in no position to judge the actual value of diamonds. This results in rampant over-valuation of consignments and diamonds. Banks fail to detect this over-invoicing, hence many such cases of fraud either go unnoticed or the banks do not know how to tackle them.
“Assessing the value of a diamond is difficult and the entire business functions on trust. That is where the problem lies—banks have to depend on information provided by traders, which cannot be verified from anywhere,” says Vijay Kalantri, president of the All India Association of Industry (AIAI). “Who will vouch for the correct value? There is gross over-valuation of products and information given to banks. There is often a difference of 20-40 per cent in the value reported.”
Because of this irregularity, the diamond business has been on the radar of the authorities and intelligence agencies for a number of years. In fact, as early as 2013, the Directorate of Revenue Intelligence alerted the authorities on discovering forged bills of entry being used to secure bank loans. Experts also point out cases of tax evasion by diamond trading companies, many of which are under investigation. There are also cases of misuse of suppliers’ credit and buyers’ credit, which the Reserve Bank of India has already pointed out. Because of these factors, everyone in the diamond trade is scared that the Nirav Modi-Punjab National Bank affair will put the diamond business in a tight spot and affect it in an adverse manner.
That’s not all. There is also over-production by diamond manufacturing companies despite lack of demand, which forces them to knock on bank doors for loans. “There is a lot of inventory in the market as there is no demand,” says Damji Mavani, secretary of the Surat Diamond Association. “There is a recession in the market, but companies are keeping production going despite mounting losses. They are in no position to pay back the banks. That is why there are so many defaulters in this trade.”
No wonder, there have been several scams in the diamond trade—for example, the Jatin Mehta, Winsome Diamonds or Su Raj Diamonds case of 2014, in which the CBI booked six cases in 2017, and the ongoing Geetanjali Gems and the Nirav Modi case.
Diamond sector traders point out that the system is such that the larger players can easily access bank loans, while the smaller ones are left high and dry. And most scams involve the larger players. “The large ones get bank loans easily, but the conditions are so stringent that the small ones have to struggle to get these loans. In most cases, they don’t get it,” says Mavani.
The current scam is likely to make life more difficult for those in the diamond trade, especially the smaller ones, as banks will tighten their screws and make accessing capital more difficult. Despite its good numbers, the industry is already in the throes of a downturn. Since 2015, over 350 units have had to close down in Surat and Saurashtra because of lack of demand and mounting losses. The government will have to tighten the noose on the defaulters to bring some order into this trade and take steps to revive the industry, particularly the smaller units, if it wants to realise Prime Minister Narendra Modi’s dream of making India a preferred destination for manufacturers of diamonds.