Cutting It Fine With Diamonds

There is an uneasy calm in the diamond trading hub in Surat바카라�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 world바카라�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, India바카라�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 world바카라�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 cent바카라�that바카라�s 75 per cent of the world바카라�s polished diamonds바카라�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.

바카라�Domestic market is showing good recovery and exports markets have shown good growth,바카라� says Sanjay Kothari, former chairman of the GJEPC. 바카라�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.바카라�

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 trade바카라�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.

바카라�Assessing the value of a diamond is difficult and the entire business functions on trust. That is where the pro­blem lies바카라�banks have to depend on information provided by traders, which cannot be verified from anywhere,바카라� says Vijay Kalantri, president of the All India Association of Industry (AIAI). 바카라�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.바카라�

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 suppliers바카라� credit and buyers바카라� 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.

That바카라�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. 바카라�There is a lot of inv­entory in the market as there is no dem­and,바카라� says Damji Mavani, secretary of the Surat Diamond Association. 바카라�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.바카라�

No wonder, there have been several scams in the diamond trade바카라�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. 바카라�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 don바카라�t get it,바카라� 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 Modi바카라�s dream of making India a preferred destination for manufacturers of diamonds.