The latest release on Balance of Payments, for Q2FY14, shows a sharp decline in the current account deficit (CAD)—to 1.2% of the GDP. A bulk of this decline is attributed to the steep fall in gold imports and, for a while, the might of the government to set things right by raising import duty on gold appears to be bearing the desired fruits. The gold imports, as per the provisional data, has declined to $1,080 million in December 2013 from a peak of $7,500 million in May 2013.
Although gold imports through official channels has declined, unofficial channels are making good of the the vast, inelastic demand for gold which is fuelling the high domestic prices premium. Concomitantly, there has been a steep rise in seizures by the Directorate of
Revenue Intelligence (DRI). While there was no seizure of gold in the total seizures made in FY11, in FY12 gold accounted for 3% of the seizures and 8% in FY13. This speaks volumes of the negative externality that the gold import curbs have created. Drawing inference from the latest media reports, DRI officials estimate gold smuggling to the tune of 500 kg per day (182 tonnes a year) hapenning.
This implies a monthly expenditure of R4,500 crores! As per the World Gold Council November 2013 report, in the first eight months of FY14, India has already imported 450 tonnes and, with festive demand in the fourth quarter expected to be strong, the unofficial channels will relentlessly cater to this demand.
The massive diversion of household investible surplus into gold, irrespective of the channel through which it has been procured is a matter of serious concern. A close look at these trends reveals that the immediate solace on CAD figures attributed to the drop in gold imports may be short-lived. The comfort is ill-founded on three counts—first, the trade data for gold is highly distorted on the account of over-invoicing of imports. For example, total imports of gold from Switzerland in 2012 were $26 billion while the corresponding export figures, made by Switzerland to India, is just $6 billion! Extrapolating similar trends in other commodities implies that the official CAD need not reflect the true CAD to the extent of such discrepancies. In fact, the
Financial Action Task Force survey in 2006 concluded that most of the customs agencies inspect only 5% of the cargo shipment entering their jurisdiction; the fact