80:20 gold scheme: The RBI circular that benefitted a few private parties

The circular was issued in last days of the UPA government and a few days before the Narendra Modi-led NDA government took office

After Nirav modi and Gitanjali fraud on PNB, the skeleton of the 80:20 gold import scheme restricting gold import announced by the United Progressive Alliance (UPA) government are beginning to tumble out. Now, the fact coming out is that the Reserve Bank of India (RBI) had apparently been informed in writing about how its circular, issued a few days before the Narendra Modi-led present National Democratic Alliance (NDA) government took office, helped a select few private parties.

On May 21, 2014, a week after the result of the general elections (declaring Modi's victory) and days before the UPA government wuld demit office, the RBI issued a circular allowing the import of gold by private parties who had not even catered to exporters of gold, to import gold. The circular made the 80:20 scheme practically ineffective without scrapping it.

The leading domestic jewellery body, the Indian Bullion and Jewellers Association, had written to this effect on July 26, 2014, to the then RBI Governor Raghuram Rajan. The letter explained how "the outgoing UPA government did a retreating army's job by diluting the 80:20 gold import scheme".

Gold price in India was quoting around $150 per ounce or 10 per cent over the price of gold in those days. The original scheme was allowing gold import to those who had export track record and furnished proof of having exported 20 per cent of imported lot before importing a fresh lot.

IBJA had told the RBI that, "the May 21 circular allowed a few private parties to import gold in clear violation of the spirit of the 80:20 scheme -- though import was effected in the garb of the same scheme." The circular sidestepped banks who were importing gold during those days for jewellers and allowed private sector export houses to import up to 2 tonnes at a time, even those \not in the business of bullion and gold jewellery, the letter said.

How these importers of gold were using the same for re-exporting was also explained to the RBI by IBJA. Usually, making jewellery and re-exporting takes 15 to 90 days, but some exporters had different motives. IBJA said those having different motives of importing gold and engaging in round-tripping were, "converting gold into crude pendants or chains or bangles with the help of machines overnight (without making crafted jewellery for which India is known) and exporting to Dubai. In Dubai, the crude jewellery would directly go to refineries for converting into gold bars, which were received and sold in 24 hours. The loss (cost) incurred in this was more than compensated in trading in domestic market," by using the rest of the 80 per cent import quota, selling at a huge premium.