Liquidity crisis forces diamond units to cut output by half

Faced with a severe liquidity crisis, diamond polishing units in diamond hub Surat have cut operations by half. Diamond polishing units, primarily small ones, are facing a liquidity shortage, as bank finance has almost dried up amid concerns of default.

According to an industry estimate, Surat's diamond industry has a daily turnover of around Rs 150-200 crore, of which 30 per cent comes from small units.

"Small units are the most vulnerable in the present market scenario. On one side rough diamond prices continue to stay high, on the other finance cost is also high. On top of it, major players continue to import polished diamonds, thereby hitting the businesses of small units," said Dinesh Navadia, president, Surat Diamond Association (SDA).

Small diamond units are largely unorganised. Most units therefore depend on costly private finance. Further, a volatile currency and increasing imports have adversely affected the business of small players.

"Most small units are in bad shape, as the revenue cycle has been disturbed due to the widening gap between costs and earnings. Therefore many prefer to reduce their production to avoid working capital requirements," said Pravin Nanavati, diamond expert and former president of the SDA.

The Gems and Jewellery Export Promotion Council (GJEPC) said in a recent statement that most manufacturers have already started reducing their production over the last quarter. Production over the next three months is expected to be 30-50 per cent below normally prevalent levels at this time of the year, GJEPC noted.

Commenting on the situation, Vipul Shah, the GJEPC chairman, had noted in a statement last month, "Rising prices of roughs, currency fluctuations and limited finance options, with banks having become very stringent on financing, have recently had a severe impact on the diamond business. This phenomenon has assumed critical proportions, calling for austerity measures among the trade fraternity, with a view to balance the equation between manufacturing and exports."

Gloomy economic conditions overseas have hampered diamond sales by these units. Normally, this is the time to stock up on finished goods for the festive season. But this year there are few orders and most units are not even keeping inventory.

"There is no point in stockpiling goods when we are not sure of sales. Working capital costs are high, and with shrinking margins, diamond players can't afford high finance costs," said a trader from Varachha, a diamond hub in Surat.

Further, with reduced production, the diamond industry fears widespread layoffs after Diwali if things don't turn favourable. The industry employs around 400,000 people in Surat.