Demonetisation brings payments in Surat's diamond industry to grinding halt

The Diwali vacation in Surat's diamond polishing industry is in for an unplanned extension as the recent move by the Centre to demonetise the currency notes of two denominations had hit this industry hard which thrives on a cash transaction culture. Industry insiders say that payments would be stuck for at least the next two to three months owing to paucity of cash funds, and defaults as such would rise.

Traders feel that payments for both rough and polished diamonds as well as workers' salaries that are made in cash would come to a grinding halt given that Rs 500 and Rs 1000 notes are now out of the system. "The export houses may still be better off as they have US dollars with them, but the players who operate in the local market have no option at the moment. For the next two to three months, we do not see any payments happening," said Kirti Shah, a diamond trader and polisher in Surat.

He explained that the reason behind this is that the average ticket size for payments in this industry is over Rs 5 lakh or so. "Diamonds are a valuable item, and payments are usually in the excess of Rs 5 lakh or so. Most payments are in the range of Rs 25-50 lakh for consignments," he added. There are around 20 odd firms in Surat that have a turnover of over Rs 2,000 crore, and the remaining are small and medium enterprises.

The city of Surat is not only the hub of Indian diamond manufacturing; it manufactures 95% of all diamonds processed in the world. The size of this industry is estimated to be around Rs 90,000 crore which houses close to 4,000 units of diamond cutting and polishing and employs over 2 million people in this southern city of Gujarat bordering Mumbai. The number assumes significance as the IT industry in India employs around three million people.

Diamantaires of Surat who run their businesses on a 'culture of trust' and make payments in cash operate on a 'chitthi' (paper note) system. This system that basically works on mutual trust and has been in practice for decades, implies that the details of the diamond (colour, cut, clarity) as well as the payment details would be printed on a piece of paper carrying a revenue stamp. The industry had been making efforts to move towards a more formalised agreement between two trading parties.

A similar initiative was already taken up by the industry in Mumbai, another major diamond trading hub after Surat, sometime back and already almost 50% of the traders there have converted to a more formal way of trade.

Another trader, who did not wish to be named, pointed out that the amount of black money in Surat's diamond industry is humungous. During the Income tax declaration scheme, Surat's businessmen is said to have declared close to Rs 2,400 crore of black money. In fact, reports suggest that in the last one hour to the deadline (the scheme ran between June 1 and September 30) around Rs 100 crore worth cash was disclosed by businessmen who are not only diamantaries but also real estate players.

"The money that was disclosed during the IDS is nothing but the tip of the ice-berg. There is still a lot of black money in Surat's system," said the diamond trader.

Much of the money from the diamond business goes into real estate, and this is considered to be one of the reasons why defaults in diamond trading are high. As of now, the industry is reeling under Rs 3,000 crore worth defaults.

Another impact of the Centre's move is that Angadias who deliver diamonds and cash to their parties in Surat and Mumbai would be out of business. These businesses are estimated to have a turnover of Rs 150 crore per day.

Traders say that business would be severely affected until the new cash comes into the system. Some like Shah laud the government move and say that this was long overdue.