Ceramic industry stares at 60% slowdown as diamond capital extends Diwali vacation

The impact of demonetisation is likely to continue in the run-up to and during Christmas, when global demand for cut and polished diamonds increases


The diamond industry of Surat has seen business decline 25% since the demonetisation drive. Photo: Mint
The diamond industry of Surat has seen business decline 25% since the demonetisation drive. Photo: Mint

Ahmedabad: Small diamond and ceramics units in Gujarat are bearing the brunt of the government’s ban on high-value banknotes. Many diamond processing units in Surat have extended the Diwali holiday for workers and 60% of the ceramics factories in Morbi town are likely to have downed their shutters.

The diamond industry of Surat, with an annual turnover of about Rs95,000 crore, has seen business decline 25% since the government on 8 November scrapped the Rs1,000 and Rs500 currency notes in a crackdown on black money.

The impact of the ban is likely to continue in the run-up to and during Christmas, when global demand for cut and polished diamonds increases.

Surat is home to 4,000-4,500 diamond processing units that employ about 500,000 workers. While about 150 firms hold over 50% of the market share and their businesses seems to be unaffected, small units dealing in cash for payment to workers have been the hardest hit by the cash crunch.

“About 93% of our clients are in the international markets. The industry had closed down due to Diwali vacation and today about 60% of the units are working. The small scale industries have extended the vacation period till 1 December. But overall the industry is not much impacted because less than 5% of the companies have a majority market share even in terms of employment and their business is not impacted,” said Dinesh Navadia, president of Surat Diamond Association.

Diamond tycoon Savjibhai Dholakia, known for giving out cars and flats to employees as Diwali bonuses, said his company Hare Krishna Exports has not been impacted by the demonetisation move as they have been paying all employees by cheque.

He said that the business was already 10% down during Diwali before the demonetisation.

“Everyone has a different business cycle so it is very difficult to say whether one has been impacted or not. Demonetisation is for the overall good of our country. About 20-25% of diamond industry business will be down for some time even during Christmas. It will take a year’s time to be normal,” Dholakia said over the phone.

The move by the Centre has, however, brought the so-called Angadia or informal courier business to a grinding halt which Navadia says is a blessing in disguise as it will stop unaccounted money transfers.

The diamond industry has been using Angadia services since 1965 when the reach of banks and post offices was limited. There are at least 40-50 Angadias who deliver cash and diamonds to their clients in Mumbai and Surat.

Often seen as local hawala, the movement of Angadias has been hard to track as they deal largely through cash transfers on the basis of trust and not the physical movement of cash. The Election Commission of India had during the 2012 Gujarat state elections called for a ban of Angadias, but many were back in business after the polls.

“From the last five years, Angadia business has been down but they serve about 30% of diamond industry even today and their businesses will be impacted,” according to Navadia.

Meanwhile, about 500 kilometers away from Surat, as many as 200 out of 650 large ceramic factories have closed down in the last one week. With an annual turnover of about Rs24,000 crore last year, the industry employs close to 400,000 labourers and produces about 1,600 million square meters of tiles a year.

“After demonetisation we carried out an online survey for large factories (having premises of 10 to 30 acres) and found that 200 factories closed last week and 180 more are going to close the coming week due to cash crunch. We have submitted this data to the district collector. About 3,000 trucks are required for getting raw materials from Rajasthan every day. Every factory needs anywhere between Rs2-5 lakh to pay to transporters which is by way of cash. Also there is a problem of cash crunch in dispatch of finished goods to our customers across the country,” said K G Kundaria, president of Morbi Ceramic Association. He said that business would be down from Rs65-70 crore per day to Rs25 crore a day.

Also most of the unskilled workers employed in the ceramic industry are migrants from other states and they have been paid in cash so far. The ceramic industry in Morbi supports over 2,000 auxiliary industries, including paper mills, packaging and engineering workshops and ceramic machinery factories and they have also been impacted.

With business being already down by 30% and a similar impact seen in coming week, Kundaria says that the state government has initiated a process to help ceramic industry workers open bank accounts. He is hopeful that the government will allow ceramic factory owners to withdraw up to Rs5 lakh in cash daily.

The ceramic industry is mainly dependent on the real estate sector and with housing prices expected to drop up to 30% in major cities due to demonetisation, the Morbi industry would be in for more challenging times.

Even so, Kundaria said that he and the entire ceramics industry of Morbi support demonetisation and that are prepared to bear business losses for the next one year.

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