Getting it wrong on gold

Oct 22 2013, 02:48 IST
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SummaryA comparison of FY14 Q1 and Q2 import figures suggests that illegal trade in the metal has gone up in the new duty regime

For 22 years India has been freely importing gold. Before that huge quantities sneaked in the country through smuggling. In 1991, the import of gold was officially authorised. Banks and public sector institutions welcomed these non-recognised importers as bullion dealers of creditable credentials. Now the same bullion dealers, with reversal of policy, again become suspect in the eyes of the officialdom which believes that investment in yellow metal is unproductive and, perhaps, anti-national. Unfortunately, bullion import is now wrongly targeted as non-remunerative investment while the poor performance of the economy can be attributed to lack of governance at the highest level.

With the crimping of gold imports, the government is only advertising its insufficiency or lack of means. After April 2013, the government hiked import duty on the yellow metal to 10%. An additional requirement, enforced with oversight of investigating agencies, is that 20% of the metal of any single import window has to be compulsorily exported before any further quantity can be officially brought in. These controls are apparently introduced to contain current account deficit (CAD) which was nearly 5% of the GDP. Ideally, CAD needs to be maintained below 3%.

With the above restrictions, the government claims that the CAD would be 3.7% or around $70 billion. At a current value of about $ 1350.00 per troy oz., Indian imports of 800 tons in a single year are valued at $34 billion — about 1.9% of the GDP. Had imports been, as usual, duty free business, CAD would have been (3.7+1.9 =) 5.6%, which the finance ministry can ill-afford to project.

Indian demand for gold is inelastic which means the price, whether high or low, is immaterial to the demand/consumption of commodity. About 800 tonnes or more of gold— whether priced $2000 per troy oz or $1000 per troy oz, will land in the country somehow. Since the 10% duty fosters an arbitrage through grey channels, more imports will be unofficial than official. So, the administrative steps may appear logical but curbing imports has initiated large-scale smuggling of gold. Therefore, national wealth will not be accounted correctly in the country’s balance sheet by the government despite it being fully aware of the shadow trade. Part of NRI remittances could fund gold imports through unreported transactions. To that extent official remittance will also decline.

The finance ministry can claim reduction in CAD to 3.7% on

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