U.S. Slowdown Dulls Sparkle of India's Diamond Capital

By TARIQ ENGINEER

SURAT, India -- The global capital of the diamond-polishing trade is losing its luster.

For more than two decades, this coastal city in the western Indian state of Gujarat has been a crucial way station in the world's diamond trade: Eight of every 10 finished diamonds in the world are cut and polished here before export to markets such as the U.S. At its peak three years ago, the industry generated exports of about $12 billion a year.

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A young diamond polisher at work in a small factory in Surat.

But while wages elsewhere in India have risen, the owners of diamond-cutting businesses have kept a tight cap on pay, prompting an exodus of workers for more lucrative jobs. Now the industry is bracing for another blow, this one from the slowdown in the U.S., which as recently as two years ago imported roughly half the diamonds finished in Surat.

Some 250,000 workers, a third of the city's diamond-cutting and polishing work force, have left the industry in the last three years, winnowing those employed in the trade to about 500,000. After cutters and polishers went on strike in July, the Surat Diamond Association, an industry body of manufacturers and traders, agreed to a 20% wage increase -- the first in a decade.

Surat's exports grew at an average of more than 20% a year in dollar terms from 2002 to 2005. In 2006, growth fell to 6%. The following year was worse: Exports shrank 8%. The industry appeared to rebound in the year ended March 31, with export growth of 30%, but industry executives say the numbers are misleading, boosted by the elimination of import duties. In effect, says Sanjay Kothari, chairman of the Gem and Jewelry Export Promotion Council of India, exports were flat.

The slump is taking a toll: C.P. Vanani, president of the Diamond Association, estimates 15% of the 4,000 factories in Surat have closed in the last several years.

"The American slowdown is the biggest problem," says 52-year-old Ganesh Ghevariya, who has been in the business for 35 years. Half the employees at his small-scale cutting and polishing factory have left over the last two years, he says. Now, he employs 150.

Down the hall from his office, two dozen workers sit on the floor in a large room, some without shirts to cope with the sweltering heat. They cut and polish the tiny stones by hand, making little black marks as guides as they use a rotating saw to shape the stones. Mr. Ghevariya says his revenue last year was about $200,000.

Diamonds came to Surat at the beginning of the 20th century, when Indian merchants returned from East Africa with boats loaded with the stones. In the 1960s, Surat began to overtake Mumbai as a diamond-manufacturing capital. It was able to break the dominance of the diamond industry in Antwerp, Belgium, using low-cost labor to produce more small-carat stones than had previously been viable.

Today, Surat's diamond merchants are trying to lessen their dependence on the U.S. by targeting other countries, including India, and increasing the amount of finished jewelry they produce.

It will be heavy going. "Our industry has never seen such a market since we have been in diamonds," says Aagam Sanghvi, 24, a director of Sanghvi Group, one of India's largest diamond cutters. Sanghvi's offices in New York, Los Angeles and Houston sell polished diamonds; the U.S. accounted for 50% of its $400 million in revenue for the year ended March 31. It has expanded in the Middle East and Asia to help offset the U.S. slowdown. But now demand is slowing even in those markets. "Payments are being delayed. There is [a] liquidity crisis everywhere," Mr. Sanghvi says.