Column: More glitter than gold

May 29 2014, 04:27 IST
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SummaryPSUs being made gold import channels imposes great costs on them without any commensurate gains

In FY13, bullion imports climbed to $54 billion and CAD (current account deficit) to about 4.7% of GDP. To cap CAD within a tolerable limit in FY14, policy pundits attempted to trim imports of the precious metal by raising import duty to 10% from 2% and imposing 20% jewellery export obligation. Only 80% is permitted for domestic usage.

These measures restricted the CAD at $29 billion in FY14 (1.7% of GDP) but hiked premium on Indian prices by $120-150 dollars per troy ounce (or per 31 gram approximately) making shady transactions/illicit channels very lucrative.

Ascension of CAD in FY13 is attributable to multiple constraints and not bullion alone, e.g., lack of FDI and FII inflows, ban on iron ore exports, prohibition on wheat/rice exports till 2011, slowdown in other exports, etc. Briefly, dollar inflows declined.

Simultaneously, import of precious metals through nominated PSUs and banks intensified forex outflows. Former finance minister P Chidambaram was the first to advise official agencies to halt precious metal imports.

PSUs and Indian banks provide significant financial comfort to overseas sellers especially when import is undertaken on “consignment basis”. Normally, private trade should be importing directly without “fronting” PSUs and banks, by establishing letters of credits on sellers abroad. By routing trade via government agencies, private entities shift their risk profile from international contracts to domestic agreements which can be managed with relative ease in case of defaults due to laxity in enforcement and systemic flaws in Indian legal framework.

Bullion bloats turnover

MMTC/STC/PEC-authorised banks are government’s nominated channels for import of precious metal. In FY13—“sales turnover vs “bullion import” (ratio) of these three trading para-statals was: MMTC, R28,600 crore vs R13, 675 crore (60%); STC, R18,700 crore vs R11,250 crore (60%); PEC,R11, 650 crore vs R1,275 crore. In FY12, MMTC imported about R 51,000 crore of precious metal vs a total business of R66,000 crore, about 77% of this company’s trading volume.

Import is undertaken for private trade on back-to-back basis, agreements on consignment basis with some margin money (advance payment of 10-15% approx), which insulates the PSUs from price volatility and dollar/rupee fluctuations. PSU earnings are generally a meagre 0.1% or even less. Trader’s profits or losses depend upon speculative positions. Gold import gives PSUs and banks the benefit of bloated turnover albeit with near zero profitability. (However, PSUs earned 4%-5% in FY14 through the “special

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