Gold industry worried that govt will curb imports to stem CAD, rupee fall

Experts argue past restrictions have resulted in smuggling. They recommend safer alternatives to achieve govt's aims

The government's decision to put curbs on imports of non-essential commodities has sent ripples through the gold industry. In the past too, the yellow metal drew attention when the rupee fell sharply in a short period. While the finance ministry is yet to clarify imports of which commodities will face curbs, the bullion industry is worried and considering steps so that curbs don't harm the industry's growth.

The reason for its proactive approach is that curbs put in place during the rupee's 2013 rout such as raising import duty to 10 per cent in phases and announcement of the 80:20 scheme did not achieve the desired results. The scheme, which mandated that 20 per cent of the gold be used for exports and the remaining 80 per cent for the domestic market, has miserably failed and opened smuggling routes which are still flourishing. 

After the 80:20 scheme was implemented, the premium on imported gold in the domestic market was quoted as high as $200 per ounce, making smuggling lucrative. As a result, official imports fell, while imports through unofficial channels replaced that.

In August, the gold import bill was $3.6 bn which is nearly double of what it was in August 2017, triggering speculation on possible restrictions. In the last two months, 167 tonnes of gold was imported officially. However, an analyst tracking gold said that in the previous months gold import was low and the stockist pipeline was empty. So, the rise in imports seen in the last two months is unlikely to continue.

The government has a reason to think differently as global gold prices have fallen more than the rupee's depreciation, and hence domestic prices are around 5-6 per cent lower than what was prevailing a few months ago.

Many feel that putting curbs on gold imports on a consignment basis would be more logical because payment is made when gold is actually sold in India and unsold gold, if any, can be returned without making a payment. Even in May 2013, import restrictions began with a ban on consignment imports.

Shekhar Bhandari, Senior Executive Vice President, Kotak Mahindra Bank said that “Import of gold has considerably moderated over the last one year. It has lost against equity and debt asset classes on the investment side.” This is a fact because GFMS Thomson Reuters and Metal Focus, both research agencies for bullion, had said gold import is estimated to be 10 per cent lower this year than in 2017. 

India imported 616 tonnes from January to August 2017, but only 532 tonnes in the same period this year. However, he suggested, the duty differential on import duty for dore or unrefined gold and pure gold should be removed. This is because the practice of importing cheaply, refining and then selling at a little discount to the price of pure gold can be stopped by doing so.

Although another view among refiners is that refineries in India should continue to benefit from whatever marginal value-addition is done.

Ahammed MP, Chairman, Malabar Gold & Diamonds said that the government hiked import duty on gold in phases to curb CAD in the past. But, those measures did not yield the desired results. If at all the government wants to curb gold imports, then “the government, as well as the industry, should come together to undertake initiatives to mobilise idle gold kept in consumers’ lockers. If that gold can be brought successfully to the consumption cycle, the dependence on import would automatically go down.”

Gold monetisation scheme, launched in November 2015, has not yielded the desired result. Gold with temples and households is estimated to be around 25,000 tonnes. A fraction of this, if mobilised under GMS, will help cut the import bill which is averaging around $35 bn currently.

At present, a 10 per cent import duty and another 3 per cent GST have made smuggling a lucrative prospect. Last year, 140 tonnes entered India by the unofficial route. In 2018, all estimates suggest that around 200 tonnes would enter India unofficially. This means 24 per cent of the domestic demand will be met with smuggled gold.

This also is a reason why restrictions on gold imports don't work in India.

Surendra Mehta, National Secretary, India Bullion & Jewellers Association suggested a reduction of the limit under Liberalised Remittance Scheme (LRS) to $100,000 per year from existing $250,000. This is the easiest way to reduce the outflow of dollars from the country. He added that floating lower duty sovereign gold bonds may help too. Since SGBs are sold at 10 per cent duty, a lower rate would not hurt revenues, but investment demand for physical gold will be reduced.

The Reserve Bank of India has said in an annual report that response to SGBs is not due to low appetite. The differential rate for SGB and physical gold can solve this issue. Mehta also said, “3-to 5-year gold recurring deposit account may be the best mechanism to reduce current account deficit (CAD) in the present scenario.”

Not a golden rule 

• Restrictions in past have not yielded desired results
• Smuggling rising on high tax, may end 2018 with 200 tons
• GMS result poor as hardly 15-18 tons estimated to have mobilised in 3 years
• SGB helped reduce on 23.5 tons of import in 3 years, a poor result as per RBI
• Industry suggest removal of duty benefits to refineries, low duty for SGB and recurring gold deposit scheme