Gold import restriction helps parallel economy more than real economy

Demand has gone up by 13 per cent in the current fiscal to 975 tonnes even as imports have fallen.

Gold restrictions imposed by the Finance Minister has been cited as one of the main reasons for reining in Current Account Deficit (CAD) to 1.2 per cent as against a peak of 4.9 per cent. The FM in his Vote on Account speech said that CAD for the current fiscal will touch $45 billion as against $88.2 billion in the previous year. Import restrictions and hiking import duties three times during 2013 resulted in lower gold import, at least from the official channels.
 

World Gold Council (WGC) while releasing its quarterly report has said that import restrictions have had little impact on gold demand in the country. Demand has in fact gone up by 13 per cent in the current fiscal to 975 tonnes even as imports have fallen. Since government started tightening gold imports through duty hikes and various restrictions, gold imports have fallen sharply. In the second and third quarter, cumulative gold imports fell to 205 tonnes as compared to 362 tonnes in the previous year. 
 

WGC concludes that since demand has been met through imports and recycling of just over 102 tonnes, the remaining shortfall has been met by smugglers. WGC says that nearly 200 tonnes of gold has been smuggled in the country. 
 

This gold would have entered India in the second and third quarter after restrictions were imposed. According to reports, countries neighbouring India have seen a sharp increase in gold imports without a corresponding increase in demand. This gold is believed to have entered India without the government knowing about it. 
 

Size of smuggled gold is worth nearly Rs 60,000 crore (nearly $10 billion) at current prices. Had this gold been imported through official channel, CAD would have been higher by a similar amount. 
 

More importantly, Rs 60,000 crore has left the shores of the country without either the government or RBI knowing about it. Put it differently, Rs 60,000 crore has been converted into black money which has then used to pay the purchase. Not only is this a loss of liquidity but an opportunity by the government to tax the revenue had it come through official channels. Tax collection numbers presented by the FM shows a drop in tax collections by the government. 
 

Further sale of gold jewellery using smuggled gold would also be unaccounted for. Gold for investment comes through official channel as a purchase and sale trail needs to be maintained. 
 

Even though there is a temporary relief to CAD on account of lower imports, smuggling has created a much bigger problem for the government to tackle. It's clear that import restrictions have benefited the economy, but it is the parallel economy that seems to have got a much bigger boost and will continue to thrive unless restrictions are removed and reality of stickiness of gold demand is tackled.