A year ago, India's diamond capital hit the headlines when one of the largest polishing companies in the western city of Surat treated hundreds of employees to bonuses in the form of Fiat cars, apartments and jewellery. In 2015, there's no sign of a repeat bonanza in a city that by some estimates polishes about 80% of the world's diamonds.

The diamond hub of Surat is acutely feeling the pain of the slowdown in the Chinese economy as consumers pull back from luxury purchases, leaving jewellers with stocks of unsold gems. Polishers say Chinese jewellers have defaulted on deals worth millions of dollars.

Nearly half a dozen large diamond companies in the city have closed down, a significant hit for an industry that employs nearly a million people in India, two-thirds of them in Surat. Jobs are a critical issue for India's government, struggling to revive economic growth to a rate that will create employment for millions joining the workforce every year.

Chirag Virani, owner of diamond cutting and polishing firm B Virani, a company that employs nearly 500 people, said the China inflicted slowdown and overall global sentiment had severely impacted the diamond trade in Surat.

"There are some companies that have laid off people as well, there are some companies that have shortened the duration of time for the workers because if you don't have the goods, the people will be just sitting there at the big factory outlets, say 500 people," Virani said at his four-storey factory in Surat.

"So, there has been a few lay-offs, there has been a few time cuts, so it has affected quite a few people in the industry because we are talking about lakhs [hundreds of thousands] of people who are associated with the industry."

Diamond sales in China

China represents roughly a fifth of the world polished diamond market – less than half of the United States in value terms – and accounts for the same proportion of India's $23bn (£15.15bn) of annual exports.

At the peak, between 2008 and 2013, diamond jewellery sales in China grew at a compound annual rate of 18%. Now, industry executives estimate growth in single digits, and jewellers are adapting – and cutting back.

Virani said the explosive demand from China was fuelled by the opening of hundreds of diamond stores across the country, who were buying to stock up their shelves. Once the initial stocks were in place, the demand also tapered off. Vipul Shah, chairman of the Gem & Jewellery Export Promotion Council, described the setback.

"China is the second largest economy, as far as our industry is concerned. Our exports have been really hampered because of China economy going down. Currently what we used to export compared to last year, we are down almost by 35% to 40%. So it is a very big setback and we are just waiting for that economy to revive," Shah said from his office in the diamond trading hub of Mumbai.

India's exports of cut and polished diamonds in July fell 18.3% from a year ago, to $1.5bn. July imports plunged 43%to $1.9bn. Over the year, imports are expected to drop by a fifth.