In India's gloomy economy, diamond jobs are not forever

SURAT (Reuters) - For Jaysukhbhai Patel, a job cutting diamonds in Surat was the ticket to a better life for him and his family of four.

Last November, Patel's ticket expired when the small factory he worked in was shut like hundreds of others in India's diamond hub, as demand for the gems dipped in the United States and Western Europe, leaving more than 100,000 workers without jobs.

"I have worked in this industry for nearly 30 years, and I have seen many ups and downs," said Patel, father of three children who now works in a local library for less than half his previous wage of about 4,000 rupees ($78) a month.

"But I have never seen factories being shut like this."

The woes of Surat reflect a wider downturn for India's export sector, which accounts for a fifth of Asia's third largest economy. Exports have fallen four months in a row and the latest data available shows a slide of 16 percent in January.

The job losses in one of India's biggest earners come weeks before a general election that is also a potential hot potato for the Congress-led government.

During the boom years, an estimated 800,000 workers, mostly from the Saurashtra region of western Gujarat state, spent 10-12 hours a day in thousands of factories and workshops, cutting and polishing tiny rough diamonds for export.

Now mostly silent and shuttered, the factories are victims of a global financial crisis that has hit demand for the gem that defined this city for decades.

India processes about seven in every 10 of the world's diamonds, mostly cheaper stones less than a carat. Surat is the heart of the industry, built on the skills of its craftsmen, its cheap migrant labour and its legendary entrepreneurial spirit.

"People have worked hard to build this business for the last 30-40 years, but this downturn has made people risk-averse and afraid to trust their own people," said Anoop Mehta, president of Bharat Diamond Bourse, the exchange in Mumbai.

Tighter liquidity and a weaker rupee, which lost 19 percent against the dollar last year and has slipped more than 5 percent this year already, are also weighing on the industry, he said.

"What they'd earned over several years has been lost in a flash. This business runs on trust, so when payments are delayed, when orders are cancelled, it shakes your confidence."

TOO LITTLE

At about $11 billion, India's exports of cut and polished diamonds is down about 3 percent so far this fiscal year from April, the Gem & Jewellery Export Promotion Council (GJEPC) said.

Several diamond units have abandoned their business entirely, installing textile machinery or taking on other work.

"Gujaratis are very entrepreneurial and street-smart; they will quickly adapt to any situation," said Vasant Mehra, chairman of GJEPC, the main industry body.

"But this is an extreme situation, and every industry has been affected. So I do not know how they will fare."

Gujarat's Hindu-nationalist Chief Minister Narendra Modi has criticised the government for not doing enough to help workers.

Leading Congress politician Rahul Gandhi, touted as a potential prime minister, has visited Surat in a sign of the growing political weight of job losses in the export sector ahead of the April-May general election.

It is hard to come by accurate data on the number of factories or workers employed in Surat, as most units are small and do not maintain employee records, paying workers per diamond.

Estimates range from 500,000 to 800,000 workers in 6,000 to 10,000 factories and workshops.

The industry estimates that about 30-40 percent of factories have shut. More than 70 workers have committed suicide since the downturn, welfare organisations said.

Small traders, who do deals sitting on their parked motorbikes in the heart of the city's business district, now have time on their hands to discuss cricket scores.

The industry has appealed to the state and the central bank for assistance, and has also put together an emergency package of about 5 million rupees for workers.

But that has not been of much comfort to Patel.

"For so many years we've worked 12-14 hours every day for our factory owners. Now they are not helping us," he said. "The assistance they are offering is too little. And how can I learn a new trade at this age?"

FAMILY TORN

Surat and its diamond workers are not alone. A Labour Ministry survey has estimated that India's small-business sector, which accounts for more than 60 percent of economic activity, lost about half a million jobs in the October-December quarter.

Lobby group Federation of Indian Export Organisations has said exporters may cut 10 million jobs in the year to March 2009.

Surat, notorious for its opaque dealings, has long been criticised for its sweatshop-like conditions.

Babu Jirawala, leader of the Surat Diamond Workers' Association, hopes the crisis will bring about change.

"These workers have no job security, no insurance, no pension, not even an ID at their workplace," he said in his tiny office, where workers drop by from time to time for updates.

"So far it was like a family, now it's been torn apart, and owners have abandoned the workers. Now, if the central bank helps, then they must lay down conditions on these factories."

Among larger manufacturers, who are stepping up promotional efforts in new markets such as India, China and the Middle East, there is hope the crisis will strengthen the industry.

India's share of the diamond processing industry is forecast to drop to around 49 percent from 57 percent by 2015, according to consultancy KPMG, with growing competition from China and mining countries such as Angola, Namibia and Botswana.

"We will see greater discipline, and some consolidation. There were overcapacities even during the boom," said Agam Sanghavi, a director at Sanghavi Exports, one of the largest manufacturers in Surat, with several overseas offices.

"Business is down now, but the fundamentals of this industry are strong and desire for diamonds is still strong. We will come out of this stronger," he said.

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US cuts trade benefits for India, Brazil

WASHINGTON: Gold necklaces from India, an alloy from Brazil and 23 other developing country products will no longer receive US duty-free treatment, the US Trade Representative's office said on Monday. The decision was the result of an annual review of the Generalized System of Preferences, a program created in 1974 that allows 132 developing countries to export nearly 5,000 products to the United States without paying tariffs.

The United States imported $30.8 billion worth of goods under the GSP program in 2007. As a result of the latest review, 25 products that accounted for about $1.4 billion of the 2007 imports will no longer receive duty-free treatment, USTR said.

Partly because of frustration with India and Brazil's role in the Doha round of world trade talks, Congress passed tougher criteria for the GSP program in December 2006. Lawmakers such as Sen. Charles Grassley, an Iowa Republican, said they were annoyed India and Brazil received duty-free treatment under the program but were refusing in the Doha round to open their own markets to more imported goods.

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INDIA’S IMPORT DUTY EXEMPTION: CURSE OR BLESSING?

(This article was published in Israel): The Indian diamond industry is, in a strange way, enjoying a period of exceptional goodwill in the highest echelons of governance. There is a tremendous behind-the-scenes willingness to assist the industry in the development of relations with African producer countries and Russia. But the government is forthcoming at home. Just look at the Indian government’s agreement to impose a “presumptive tax system” (i.e. an agreed profit level on turnover, which is comparable to the tax systems enjoyed by the industry in Israel and Belgium) and the removal of all import taxes on polished diamonds.

What may not be sufficiently appreciated is that it takes two to tango. If the industry doesn’t do its part, the current goodwill may quickly evaporate. Not everybody in India’s government is enthusiastic about assisting the diamond industry and meeting its requests. Import duties, which have been removed, for example, can also be reinstated. Actually, manufacturers in India had severely protested the removal of these duties (fearing competition with China), and any pretext for pleading for the reimposition of the tax may well be welcomed.

The enormous success of the Indian industry is partly, maybe largely, a result of good cooperation throughout the years. The recent removal of import duties on polished diamonds was an additional step meant to make India a more attractive trading center, to enable foreign buyers to find all their polished requirements in Mumbai.

Sadly, as is often the case, one needs only a handful or so of unscrupulous profiteers to ruin a good thing for everybody. That may be the case now regarding the import duties.

The duties on polished imports were dropped from five percent to zero in May 2007. Because of the sky-rocketing activities in the four-month period preceding and following the announcement, Indian traders imported $1.41 billion worth of polished, mostly into Surat. As the system needed a “warming up,” the activity developed in earnest in July, when polished diamond imports reached nearly $0.5 billion. ($482 million, to be precise.)

These imports largely represent a “circular” trade (in-out, in-out), mostly with Dubai. One might argue that this is nothing new. But hitherto “circular” trade involved combined rough and polished transactions, balancing rough imports with (overstated) polished exports, etc. What is different now is that the free imports of polished have made it much easier to achieve greater exports and, consequently, more access to cheaper financing.

Needless to say that these newly developed manipulations are also reflected in India’s diamond export figures: in these four months (April-July), India’s polished exports soared to 12.9 million carats worth $4.07 billion – a 25 percent increase over the comparable period last year. The polished manipulations were clearly evident in July, when total polished diamond exports registered a growth of 50 percent over the same months last year!

The Nature of the Circular Trade

In all fairness, part of the polished imports is quite legitimate. The zero duty enabled many Indian diamantaires to bring home some of their own stocks held in overseas inventories, especially appealing to do when there is an active and attractive local market for the goods.

Surat is the preferred location for imports. In the Mumbai trading hub, there is a two percent tax (octroi) on all imports from other Indian states if the diamonds are sold for consumption within Mumbai limits. A tax exemption is possible when a guarantee of re-export is given.

It is therefore prudent tax planning that many of the imports go to affiliates in Surat, where there is no such a tax.

As in the last fiscal year – when there was still a five percent duty in effect – monthly polished imports averaged $158 million (about the equivalent of 32 percent of July’s imports). It is probably fair to say that about a third of the current imports represent ordinary business serving the domestic trade. Allowing also for natural trade growth and inventory returns, one might conjecture that the “unusual” “circular” trade only applies – so far – to about half of the activity.

How does the “circular” trade operate and what is its purpose to begin with? Certain individuals, or agents,(not necessarily from the diamond business) will import polished diamonds from Dubai for a service fee on behalf of third parties. These fees are as low as 0.1 percent, but, of course, these commissions “add up” to nice income. These agents may themselves pay for these imports at the official exchange rate and then sell the dollar proceeds off on the local black currency market. The differences can be substantial. It’s easy profit.

However, there is a variation on the scheme that is far more prevalent: The agent imports the polished into Surat on behalf of a third party (again, for a service fee) and then sells these goods officially (i.e. invoiced) to that very same party, which will then officially export these goods (to Dubai) and enjoy subsidized (concessionary) export financing.

These funds are put to work in the domestic informal non-bank financing sectors. When the margins on the proper diamond business are minimal or non-existing, it is tempting to earn good money on the grey financial markets. Moreover, a few months down the road, when the export proceeds are officially remitted, there is an added bonus of earning rupees because of the continued appreciation of the exchange rate.

Officials of the Gem and Jewellery Export Council are Concerned

These are very sensitive issues and it is hard to get either official information or comments about them. However, after talking with some members of the board of directors of India’s Gem and Jewellery Export Promotion Council, I am aware that they are privately distraught about these practices and, frankly, they also find it hard to “quantify” the volumes involved.

From the Council’s perspective, everything is proper and legal. All imports are official, the shipments take place through the established courier services, and all subsequent re-exports are also official. Even if the Council may not like some practices, it probably isn’t allowed or capable to intervene.

Of the various leading local manufacturers and exporters with whom I have talked, some confirmed that they “have been approached” by operators suggesting their participation in the “circular” scheme, mainly to get an advantage of exchange rate differentials. One sophisticated trader said, “Chaim, there are some aspects of these transactions I frankly don’t understand. Playing safe is staying away from it all.”

A major player points his finger to the Indian banks. Their eagerness to finance “circular” export trade deals is seen as a disgrace. Bank financing sources aren’t infinite – and proper exporters need to compete with “less proper” exporters for the available borrowed resources.

The irony is that the forthcoming government support in the form of “presumptive taxes” may make it less attractive – or even undesirable – to artificially increase one’s exports.

In a vast industry that employs close to a million people, there will always be some “deviants” whose understanding of “two to tango” is limited to “dirty dancing.” They should be made known that they dance out of sync with the great majority. By taking quick action, the Indian diamond industry might rid itself from the new circular menace before real damage is inflicted.

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