5 reasons why gold import curbs need to be lifted

A look at other reasons which may force the government to lift gold import curbs

Policy making is generally considered to be a balancing act. Policy makers have to take into consideration the diverse views from various stakeholders and then act in the best interest of the country and chose the path of least adverse impact. Changes in policies have to be implemented in such a manner so that the impact, if at all is small. India however, does not follow these rules. We try out both the extremes first and then take the middle path. 

 

This type of policy making is best exhibited in the case of gold imports. After almost allowing free trade in gold which led to increased consumption and usage through savings of the precious metal not only in physical form but also electronic form and trading in exchanges, government hit the brakes hard when current account deficit (CAD) started to slip out of hand. It introduced curbs which has crippled the industry. 

 

An Economic Times report says that government is now considering relaxing these curbs since CAD seems to be in control and the country has hoarded enough foreign exchange reserves to take care of events like tapering. 

 

But is CAD the only reason to remove the curbs? Here are five reasons that say there are other compulsions which might be driving the government towards such a decision.

 

1) Even as government has claimed and patted itself for controlling CAD by restricting gold imports, ground reality shows a different picture. Government data shows there is a sharp decline in gold imports of nearly 75 per cent as compared to its imports in the previous year. From a run rate of nearly $4 billion every month in the previous year, November 2013 saw imports of only $1.2 billion. Physical imports of gold have crashed from a peak of 162 tonnes in May 2013 to less than 7 tonnes in November. However, there is no shortage of gold in the jewellery market for a willing buyer. Gold is entering the country not through customs gates but smuggled in from its neighbours. Low import duties in these countries have led to a sharp rise in gold imports there which are being smuggled into India. Extrapolation of smuggled gold data gives an idea of the rising trend in smuggling. Up to October 2013, gold worth Rs 208 cr has been seized from smugglers against Rs 107 cr last year and Rs 42.38 crore in 2011-12. 

 

2) Restricting gold imports has had an impact on exports of gold jewellery (at least through the official channels). According to the Gems and Jewellery Export Promotion Council (GJEPC), exports of gold jewellery has fallen by 52.7 per cent in the first eight months. 

 

3) Jewellery makers are cutting down jobs. Around 4 million artisans are expected to lose their jobs as per an official of All India Jems and Jewellery Trade Federation. According to Bombay Bullion Association, around 300,000 to 400,000 artisans have moved back to their villages from Zaveri Bazaar, India’s biggest bullion market. In an election year this is extremely bad news.

 

4) There has been an all-round loss in revenue for the government. Apart from the direct loss in import duty and income tax, government is losing on account of falling exports and a multiplier effect of losing jobs.

 

5) Gold Exchange Traded Funds (ETF) market and other financial products linked to gold have been affected by these import restrictions. Not being able to export gold, these asset management companies are finding it difficult to buy gold with respect to the addition of units in their scheme. As a result, a purchaser of units has to pay a premium to the existing Net Asset Value (NAV). This anomaly cannot last for long and will need to be corrected else the sector will be severely impacted.