Diamonds are forever: Inside Surat's diamond industry

Surat is the heart of diamond industry in India. An industry which remained politically inert in the past suddenly woke up to new tax regime succeeded by demonetisation exercise. Industry supports the reform goal but not the implementation process. Many say that Centre should have surveyed the diamond industry before making new rules for them.

Unlike other industries, diamond sector is workers led industry as skill set remains central to the manufacturing process. On an average, a worker can start from 15,000 rupees and end up making 5 lakh a month all depending upon skill set he possesses. It is this skill set which revolted against demonetisation. Most of the workers preferred cash. It meant less taxes and no compliance. Owners were left baffled and sore. Many workers changed their master leading to closures. Those who could manage the cash retained the best and those who couldn’t had to stop work on the floor. An industry where workers choose the owners, demonetisation tested the resolve of the owners to keep the talent in their nest.

“For the first-time owner worker conflict erupted in our industry. It was unprecedented. We had to run from pillar to post to manage the business,” said Dinesh Navadiya, known diamond merchant.

The workers had to be convinced of the benefits of the measure Prime Minister had undertaken. The mindset changed very slowly. Most of the workers come from rural areas with no personal history of banking. It also meant they had no knowledge of paperwork required for opening a bank account. With money going through the banking system and papers in place, they became eligible for loans. Many applied for Awas Yojans schemes too. It eventually benefitted them.

But heartburn remains. Many owners privately admit that government banks did a bad job during demonetisation. “Private banks did a better job. Infrastructure should have been in place for demonetisation,” said Dinesh Navadiya.

Surat’s diamond industry is the processing centre of the precious stones in India. It imports 100 per cent of the raw material and exports 94 per cent of it. Only 6 per cent of the polished diamonds are sold domestically. It also does not enjoy a high profit margin. At maximum owners enjoy profit margins between 1 to 2 per cent.

The pinch increased after GST. Unlike demonetisation whose effect was temporary, GST changed the way industry operated. It understood its benefits but was appalled at its implementation. It was this shock which provided muscle to the Congress in South Gujarat.

Textile sector was even hit harder. Demonetisation had decreased their sales in the rural areas shrinking both production and consumption leading to jobless in small and medium scale industry. It was this combined resentment which streets witnessed in succeeding months. Diamond industry escaped the full wrath of GST as it was only manufacturing locally and exporting abroad whereas Textile Industry was not only manufacturing locally but also traded the rural areas where economy entirely depended on the cash.

Even then there are major irritants. Industry wants B2B form to be done away with. It allows the government to impose interstate GST when goods are moved from one state to another independent of whether they are being sold or not. Traders crib that it adds to the cost. They argue that two other biggest hubs of diamond manufacturing, Israel and Belgium do not have such limitations. Traders also want 3 per cent GST done away on local consumption. On an average 25 per cent of the material has to be moved locally for processing and polishing because every owner doesn’t possess all the high skill set workers. For example, if the import has a stock of 20 per cent of raw diamond which can only be shaped in oval and the owner has masters of squares and circle, the rest has to be processed in someone else’s unit. On this government decided to levy 3 percent tax. Traders find it very unfair. With low percentage of profit, it adds to the cost.

More than paper work adjustment, industry’s major battle is with attitude. It is about compliance and taxation. Most of the owners are willing to give their share of Provident Fund and Employee Welfare Fund but the workers aren’t. Many say that it becomes difficult to impose such policies on workers as they tend to move away.

Though no one denies that GST has opened the gates for new export schemes, subsidies for machinery and better-priced loans but attitudes are a slow change. Implementation does remain a concern but they want the government to remember that it is a small and medium industry which generates jobs for a big chunk of Indian population and their convenience must be kept in mind.

Modi has taken a risk to implement GST but no reforms are without risk. The results will show whether economic issues will remain on top or Gujarati asmita appropriated by Modi. Jury is still out on it.