300% jump in gold export industry questions data

Sharp rupee fall, interest differential on export finance rates may have led to arbitrage in gold

While the government has taken strong measures to curb gold import, export of the precious metal quadrupled in the first 11 months of last fiscal over the previous year. In a written reply to a question in the Lok Sabha on Friday, Minister of State for Finance S S Palanimanickam stated gold exports were up from 34.6 tonnes in FY11 to 138.5 in the first 11 eleven months of FY12. Gold exports in FY10 were 23 tonnes.

Industry analysts, however, point out the jump shown in government statistics could be overstated. According to the Gems and Jewellery Export Promotion Council, exports in FY11 were approximately 109 tonnes, which rose to 127 tonnes in FY12.

But, there are indications the sharp depreciation in the rupee and the interest differential on export finance rates may have led to arbitrage in gold. Exporters get cheaper finance against exports and if gold is exported, there isn’t much risk. And, they get financing, which is attractive arbitrage. Even currency movements provide them arbitrage opportunities. An analyst tracking exports said some export houses were exporting gold just to achieve star status (which is given based on a certain amount of exports).

There could be round-tripping — money is taken out of one country and then brought back. This method, typically, is used to convert black money into white.

In the past, when Indian demand was lower during lean periods, gold used to be traded at a discount to overseas prices. That provided an opportunity to export. The government has taken several steps, including a hike in the customs duty from two to four per cent in the Budget, to curb imports.

Gold export from the country in the first eleven months of 2011-12 recorded a whopping 300 per cent jump over the total 2010-11 export.

From 850.9 tonnes in FY10, imports rose to 969.7 tonnes in FY11 and 986.1 tonnes for the first 11 months of FY12. For the full year, imports are expected to have crossed 1,000 tonnes.

Seeing the sharp rise, the government has raised the import duty on gold almost four times from Rs 300 per 10 g to two per cent in January and later to four per cent in the Budget in March. The provision was reportedly having an adverse impact on the domestic jewellery industry, said Palanimanickam.

Besides raising the import duty on gold, the government has also reduced the quantity of gold allowed to be brought by Non Resident Indians (NRIs) returning from abroad after a minimum stay of six months, from 10 kg to one kg, from April 18. While imports by NRIs are not significant, it is seen as a precautionary measure to plug any loophole as duties have been increased. According to an industry source, the import of gold jewellery from Thailand attracts just one per cent duty under the provisions of India's free trade pact with that country. Restricting imports through NRIs seems to be a precautionary measure in that regard.

The import of gold has remained substantially high in the last three years, with the total amount second only to the oil import bill. The latest Gem and Jewellery Export Promotion Council data show gold export in the form of coins and medallions was worth $6.8 billion in 2011-12 against $4.9 billion in 2010-11. The council has not given data in quantity terms but taking an average international gold price of $1,400 per ounce in 2010-11, the exported quantity would come to 109 tonnes. At an average price of $1,700 per ounce in 2011-12, it would be 127 tonnes.