Early last year, the US central bank began raising its key interest rates from the near-zero levels at which it had kept them for the previous two years. This marked the beginning of its effort to normalize conditions in the world’s largest economy, which had grown used to trillions of dollars of cash infusions and near-zero interest rates over the previous 15 years.
While the move aimed to rein in the inflation that was causing major pain to US consumers, there has been hardly any corner of the world that has been free of the ramifications of the central bank's move.
Gujarat, half a world away from the Washington DC headquarters of the US Federal Reserve, was no exception.
Known as the diamond polishing capital of the world, the state of Gujarat had built up a reputation for itself as the global hub of diamond polishing due to the industrious nature of its artisans.
Over the last half a century, the skilled workers of this western Indian state had gained recognition for being able to convert near-gem rough diamonds -- discarded by the rest of the world -- into diamonds, at a fraction of the cost of those in China and Israel.
Although the diamond-cutting industry is estimated to have started in Gujarat in the late 1930s, it was only in the 70s that it started really scaling up. By the time the global financial crisis hit in 2008, the Indian diamond processing industry centred around Surat in Gujarat was handling nearly 85% of the total diamonds processed in the world.
The industry, centred around the city of Surat, had been so successful that processing units in the state used to regularly hit the headlines for offering expensive gifts, such as cars, to its employees at the time of Diwali.
Yet, the most concrete manifestation of the scale, success and ambition of the industry is the Surat Diamond Bourse -- set to be inaugurated by Prime Minister Narendra Modi tomorrow, on Sunday, the 17th of December 2023.
There is considerable excitement over the opening a building that is touted to be the "world's largest office complex", overtaking the US military headquarters of Pentagon, thanks to its 4,200 office rooms.
Dark Clouds Gathering
Yet, the contrast in the mood could not have been more starker in the thousands of small workshops where the cutting and polishing of diamonds take place.
Ever since the unwelcome spectre of inflation reared its head in the US in mid-2021, demand for diamonds in the world’s largest market has been on a downward spiral, dragging with it the fortunes of the lakhs of diamond artisans in Gujarat.
Normally, there is a big spike in export and domestic orders in August and September in anticipation of festive demand. This time, say industry sources, there was none.
In fact, sensing the poor demand, many of the rough diamond companies and miners even cut prices this time, but to little avail.
Similarly, many of the processing units started cutting shifts by two hours daily, and to five days a week. The trend started with a few big players, who were suffering due to the high-interest burden on working capital tied up in the form of unsold inventory.
Soon, the Gem and Jewellery Export Promotion Council decided to suspend production for a two-month Diwali vacation, hoping that it would help reduce inventory and make the industry sustainable.
This has had a traumatic impact on the estimated 8 lakh workers in the diamond cutting and polishing industry.
“Diamond workers have been battling unemployment challenges for the previous two years: This time, too, prior to Diwali, most diamond artisans' salaries were lowered by 20 to 30 per cent,” says Gujarat Diamond Workers Association Vice President, Bhavesh Tank.
“Inflation is increasing on a daily basis, as are housing rents, grain costs, and gasoline prices, all while diamond workers' salaries and working days are reducing.
"So workers borrow money with interest to fulfill expenses, which shortens their lives because it cannot be paid back,” Tank says, adding that more than 30 diamond artisans have taken their own lives due to financial problems in the last five months.
“They take one debt to pay off another, becoming trapped in the interest cycle,” chimes in Ramesh Jilria, President of Gujarat Diamond Worker Association.
“Since the diamond factories have been closed for the last two months, diamond artisans in the big cities have begun to take personal loans to pay their children's school fees and to sustain their family expenses, and they take these personal loans from private financiers rather than banks, which charge high-interest rates,” Jilria adds.
“Most diamond workers come from villages, and some artisans who live in cities and are unable to earn a living or obtain a loan have returned to their villages.”
Bhavesh, of Gujarat Diamond Workers Association, says neither the government nor the industry has taken notice of these suicides, even though the conditions of their families are appalling.
Industry Under Pressure
While the condition of the artisans may be miserable, industry owners say they are in worse shape.
They point out that the global diamond industry was expected to grow 5.1% in 2023. However, one of the leading diamond retail brands in the US has estimated that the US retail market would decline by 7% instead.
"Every Diwali and September, the diamond industry booms, but nothing like that happened this time, since European countries' recession is wreaking havoc on Gujarat's diamond sector,” said Naimesh Pachchigar, Gujarat President of the Indian Bullion Jewellers Association.
“As the diamond business ceased buying rough diamonds in the interim, supply and demand declined, and artisans naturally found less work. The diamond business has also reduced its purchases of rough diamonds in order to decrease losses, resulting in less money being given to artists."
If the international retail buyer market is dull, importers in foreign countries will place fewer orders, point out industry owners. Indeed, going by central government data, India’s export of cut and polished diamonds in April to June, fell to Rs 60,222 crore from Rs 77,500 crore in the same three months of last year.
“The main diamond market of Gujarat is America, but the current economic condition of America is not good, it is natural that people will not buy diamonds,” says Dinesh Navdiya, President of the Indian Diamond Institute and former regional chairman of the Gem & Jewellery Export Promotion Council (GJEPC).
“The entire market of Gujarat depends on America, if the condition of America improves, then the condition of Gujarat's diamond market will improve. The Gujarat diamond market has been in recession for the last two years.”
Lab Grown Diamonds
Amid all the gloom and doom, there is one small segment within the industry that is still doing fine – the lab-grown diamonds or LGD business.
According to an international market analyst lab-grown or man-made diamond market was 1 billion US$ in the year 2016, which grew to $12 billion in 2022, with an annual growth rate of 17%, in the last two calendar years the growth rate was 38%.
Market researchers forecast that the lab-grown diamond’s global market of $22.45 billion will reach a new height of $37.32 billion in 2028.
Those in the natural or real diamond sector are calling the growth a myth stating that the market value of lab grown has grown hardly by 1 to 2 percent.
Given that both lab-grown and natural stones have the same physical and chemical characteristics, it is possible for artisans and units specialising in natural stones to switch over to the lab-grown variety seamlessly.
However, the business is still very small, and is not enough to make a noticeable difference to the artisans’ conditions.
Moreover, lab-grown diamonds are far less lucrative a business compared to that in natural stones, and unsurprisingly, many view the fast-growing segment as a threat, rather than an opportunity.
Players in the real diamond market have started feeling the pinch of growing demand for lab-grown diamonds. Experts in the market say lab-grown diamond is sold at a very heavy discount, ranging from 25 to 35%, some retailers even offer an 80% discount, because of which price-sensitive customers are moving to lab-grown diamonds instead of real diamonds.
As a consequence, the prices of both real and lab-grown have fallen steeply, squeezing margins in both sectors.
However, Sanket Patel, director of Green Lab, which pitches itself as the world’s largest lab-grown diamond maker, says it is the lab-grown segment that has acted as a pillar of support for the overall industry.
Patel points out that only 33% of diamond vendors in the US were selling labgrown diamonds in 2021, but this has risen to more than 80% now.
“Diamond was in limited supply…People thought this was a really rare thing, but now that they know there is no difference between lab-grown diamond and original diamond, they have switched to lab-grown diamond,” Sanket Patel added.
“If anyone has kept the diamond industry going, which is currently slowly collapsing, it is the Labgrown Diamond Industry. This industry has done so by giving many diamond artisans large-scale jobs; today, many of the artisans who worked on natural diamonds are employed by Labgrown Diamond. It's because buying real diamonds has become much less common," said Patel.
“Diamond artisans who work on Labgrown Diamond do not differ from those who work on Real Diamond; in fact, they are now employed continuously," he added
Meanwhile, some are hoping that the opening of the Surat Diamond Bourse will be a good omen that marks the return of good times for the industry.
Lending strength to such expectations is the decision by the US central bank to roll-back its restrictive monetary policy potentially unleashing a sea of liquidity that will spur consumer spending in western economies next year.
For the workmen of Gujarat, the hope is that some of that liquidity will also reach them soon, in time for their children's next school fee installment.