by Greg Klein | December 2, 2016
India’s sudden ban on 500- and 1,000-rupee notes early last month has suspended at least some operations in the northwestern city of Surat, the world capital of diamond cutting and polishing. Various sources credit the city with transforming approximately 80% of the globe’s rough into jewelry. India is also the world’s third-largest consumer of diamond-ensconced bling.
NDTV reports businesses closing as the lack of cash prevents them from buying rough and paying employees. The government ordered citizens to deposit the notes, worth about $9.77 and $19.54 Canadian, and conduct transactions electronically.
Governments that have limited the use of cash have cited the need to combat terrorism, money laundering, corruption, counterfeiting, tax evasion and the underground economy. Rapaport News stated India’s underground economy constituted 23.2% of GDP, according to 2007 data in the latest World Bank survey.
Only about 30% of Surat’s diamond cutters have bank accounts, NDTV added.
“This industry has been working on an illegal mode of payment in cash until now and to shift to a cashless system will take at least four to six months,” one business owner told the news outlet. But he stated the government decree will eventually benefit merchants and workers. Another source said he expects the suspension to last at least one and a half months.
The two denominations reportedly accounted for 85% or 86% of Indian money in circulation. “The liquidity freeze could influence a global slowdown in demand for lower colour and clarity polished, and in very small melee stones,” Rapaport stated.
Following the first tender of Quebec diamonds in Antwerp last month, Stornoway Diamond TSX:SWY president/CEO Matt Manson attributed India’s demonetization to reduced prices and demand for smaller and lower-quality stones. He said some were removed from the event, to be sold later.
India’s government plans to issue new denominations of 500 and 2,000 rupees. But, NDTV reported December 2, an enormous hoard of contraband seized from a group of low-paid government employees included 57 million rupees (in Canuck terms, over $1.11 million) in so-far uncirculated 2,000-rupee notes.