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.

This year, there's no sign of a repeat bonanza in a city that by some estimates polishes about 80 percent of the world's diamonds.

More than 5,000 Surat polishers have lost their jobs since June and thousands more could be left without work, as Chinese consumers pull back from luxury purchases, leaving jewellers with stocks of unsold jewellery and 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.

Sunilkumar Rajput spent 25 years cutting gems in this coastal city, where streets are lined with workshops of all sizes, bustling with craftsmen huddled under desk lamps, preparing to carve rough diamonds into multi-faceted gems. He lost his job in June.

"I am ready to work even at half the salary I was getting in my previous job,

but no one will listen," says Rajput, 45, speaking in a quiet side street of Surat. He has sent his children back to his home state of Uttar Pradesh, in India's north, to save money.

Distress in Surat's warren of polishing houses comes at a time of unrest across the state of Gujarat -Prime Minister Narendra Modi's home base - where hundreds of thousands of members of the Patidar, or Patel, community have held protests to demand changes to India's affirmative action policies, which they say hurt them.

Like many of Gujarat's largest industries, diamond polishing is dominated by Patels, who make up 14 percent of the state and a nascent but disgruntled middle class.

Hiren Patel, 35, says his salary

has halved since June: "We have work only for three days a week. ”

Last month, he joined a rally of at least half a million people which turned violent, leaving at least seven dead.

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 $23 billion of annual exports.

But its growth has fuelled the diamond industry in recent years, as jewellery stores expanded at breakneck pace to cater for luxury hungry consumers.

At the peak, between 2008 and 2013, diamond jewellery sales in China grew at a compound annual rate of 18 percent. Now, industry

executives estimate growth in single digits, and jewellers are adapting -and cutting back.

A stock market crash since June and slowing growth has hurt the wealthy in China. Also, a crackdown on corruption has meant that the rich are fearful of any ostentatious signs of wealth, and among luxury goods, jewellery has taken a big hit.

Surat polishes cheaper diamonds of less than a carat, but is also known for solitaires - single stones - popular with Chinese buyers.

"In the last couple of years China was on an explosive growth path,” said Stephen Lussier, CEO of Forevermark, the diamond brand of the De Beers group, the world's largest diamond company by market value. "Now, demand for polished diamonds in China has significantly reduced relative to ayear ago."

Vipul Shah, chairman of the Gem & Jewellery Export Promotion Council, estimates a drop of 50 percent this fiscal year from a year ago.

Surat’s ranks of craftsmen, swollen by cheap migrant labour, ballooned over the boom years in anticipation of more growth and ever-higher diamond prices. Instead, margins are squeezed as polished prices fall faster than rough, with even major producers Anglo American-owned De Beers and Russia's Alrosa pulling back.

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