India's diamond industry, already rattled by the weakening global economy, has had its confidence further damaged by the discovery in the past few weeks of more than 20 bombs in Surat, the center of the world's diamond cutting and polishing business. The outlook has also been marred by violent protests for higher pay in the sector.
Since 29 July, when the first live bomb was discovered, 25 bombs have been found and defused in Surat, in Gujarat state. While the bombs were recovered before they could cause any damage, their discovery in areas like Varachha, home to most of the town's diamond processing units triggered panic. At least six bombs were found in Varachha's Mini Diamond Bazaar.
More than 800,000 workers cut and polish rough diamonds in Surat, earning India US$11 billion in exports last year. Around 92% of the world's diamond roughs are cut and polished in the town.
The bombs were part of a wider campaign apparently aimed at damaging India's economy. More than 50 people were killed when 25 bombs ripped through Ahmedabad and Bangalore a few days before the Surat bombs were discovered. Ahmedabad is a prosperous commercial hub, while Bangalore is India's IT capital. Analysts believe that the bombs in Surat were aimed at striking terror at the heart of India's - indeed of the world's - diamond trade.
"Surat is a huge city, but considering all the bombs were planted in areas where the diamond industry is based, I think there is a message in that," Pravinbhai Nanavati, vice president of the Southern Gujarat Chambers of Commerce and Industry, told the BBC. "The bombs [in Surat] were planted by those who wanted to hurt India economically," he observed, underlining the fact that "stopping production for one day in the diamond industry means a loss of US$28 million".
The threat of terrorism comes at a bad time for India's diamond industry. In early July, workers in cutting and polishing units in Surat and Bhavnagar went on a strike to press for higher wages. With hundreds of thousands of workers out on the streets, workshops were forced to down shutters. The Surat Diamond Traders Association recommended a 20% salary hike to defuse the crisis.
With the strike over and concern at the discovery of bombs having eased, workshops are again humming with activity. But beneath the calm worries remain.
July saw a "roughly 35% downturn in business because of recession," Kamlesh Jhaveri, director of the Mumbai-headquartered London Star Diamond Company, told Asia Times Online. The US imports around $40 billion worth diamonds from India - in 2006-07 it accounted for 60% of diamonds exported from India - and the slowing US economy has hit the Indian diamond industry hard.
To add to these woes, the Diamond Trading Corporation, which controls 80% of the global trade in rough diamonds, last month announced a 5% increase in the price of roughs. The price of roughs had increased 8.5% earlier this year amid strong demand for diamonds in India, China and the Middle East and reduced supply.
The supply of roughs, already on the wane in recent years has tightened further with several Indian sightholders being cut out by De Beers under its global rough diamond distribution plan.
Although cutting and polishing of diamonds gives the stones their sparkle, the process yields thin margins as the cost of the raw material accounts for 85-95% of the selling price. With the cost of diamond roughs surging these margins have shrunk further. Thousands of factories in Surat, Bhavnagar and other towns in Gujarat are said to have shut down over the past year.
Competition to Surat has also grown, with diamond mining countries in Africa demanding that cutting and processing units be set up there. Analysts have also warned of looming competition from China's cutting and polishing business.
Media reports have said that the recent threat of terrorism to Surat and the wage hike for workers will add to the industry's growing woes. These reports have pointed out that foreign buyers who would have started streaming into Surat now for purchase of diamonds ahead of the Christmas season have put off plans fearing terrorist attacks. The wage hike will meanwhile add to costs and cut into margins, they argue.
Disagreeing with these reports, Jhaveri points out that Surat is a manufacturing hub and few foreign buyers go there for their purchases, anyway. As for the impact of higher wages on operating costs, it is likely to be lower than that being reported. The recommendations for a wage increase are just that - they are recommendations and aren't binding in nature. "With monitoring of implementation of these recommendations weak, it is unlikely that workers in small units will get more than a 15% hike," Jhaveri told Asia Times Online.
What could happen, however, especially if terrorism concerns were to deepen, is that workers could chose to move out of Surat to smaller towns in Gujarat that would be less likely to be targeted by terrorists. Smaller processing units might also shift to smaller towns to cut operating costs.
Contrary to media reports that point to processing units and workers shifting to Africa or China, Jhaveri says the move, if any, will be within Gujarat.
The cost of cutting and polishing a karat of stone in Africa works out to $70-$75 compared with a maximum of $20-$25 in India, Jhaveri said.
"It might not make much of difference to Israeli or Antwerp diamantaires, who have factories in Africa as they are looking at similar costs back home. But for Indian diamantaires, who have the cheap labor option that Surat and other towns in Gujarat provide, shifting processing units to Africa doesn't make economic sense," he said. Around five Indian companies have factories in South Africa and Botswana.
As for the China threat, labor cost there is also higher than that in India. China is focussing on bigger and better-quality diamonds. At the same time, processing units in China are not concentrated and so lack the benefits of infrastructure offered in India.
The China threat to India's diamond processing business has been grossly exaggerated to help India's processors can wring concessions from the government in New Delhi, said one industry insider, who wished to remain anonymous.
Nor will the displacement of Surat and other towns in Gujarat in the cutting and polishing business, "ever happen", said Jhaveri. The advantages these towns and their workers possess are unparalleled.
Gujarat in general and Surat in particular has repeatedly shown resilience in the face of adversity such as natural and man-made disasters. The entrepreneurial spirit of its people has made it a favorite investment destination, despite the blows it suffers.
The town was repeatedly raided and looted by the Maratha king Sivaji in the 17th century, fire destroyed the city in 1837 and more recently it has suffered communal riots (1992, 2002), an outbreak of a plague epidemic (1994) and floods (2006). The floods in Surat cost the diamond polishing units $60 million, yet the city has quickly bounced back, registering an 11.8% growth rate this year.
Surat might be shaken after the discovery of bombs but its spirit has certainly not been shattered.
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