RBI's gold imports restrictions: Back to 'Once upon a time in Mumbai'

Jewellers will have to look at new ways to meet their raw material requirement

Government is battling gold imports with a vengeance. It seems to be winning small battles but there is no way it can win the war. Within a month of introducing curbs, RBI withdrew the circular banning consignment imports for domestic use and 100% cash margin.These measures were considered too harsh which led to a sharp drop in imports.Gold imports fell by 80% of their May imports after imposition of these measures. 

 

After virtually crippling the industry, government has removed these norms but introduced new ones.Though not as bad as the earlier one, new norms will create a new set of problem both for the industry and government. 

 

Imposition of the Gold Control Rules in 1963, post the Indo-China war created an un-official gold market in the country. Some of the biggest names in underworld owe their existence to these gold curbs. Such high was their influence on gold imports that nearly all of gold imported in India till 1991 was through unofficial channels. 

 

After the economy opened up in 1991,gold imports were relaxed. As a result, underworld moved over from gold smuggling to extortion and terrorism. The present set of rules by the government has the potential of reviving the old trade for these misguided people, though to a smaller extent. 

 

Government through Reserve Bank of India has linked inward shipments to future exports. Banks and authorised agencies will have to ensure that at least 20% of imported gold is made available for exports. In other words, for every 100 kg of gold that is imported 20 kg of gold has to be re-exported. Only when this condition is fulfilled will the entity be allowed to again import. 

 

Currently India Imports around 864.2 tons of gold in a year and exports back only 70 tonnes, a little over 8 per cent. The new norms asks them to export 20%.

 

There are two situations that can arise out of the new norms. 

 

Either, the industry increases it exports nearly 2.5 times to 172 tonnes to meet the 20 per cent guidelines, which under the current global condition is an impossible task.  

 

Or

 

Imports come down to 350 tonnes per annum so that the 20% export limit of 70 tonnes is maintained. This would mean that the industry shrinks itself by 60% to deliver what the government expects it to. This too is a simple calculation which does not include inventory blocked in working cycle. Actual imports will have to be much lower.  

 

However, as demand for gold and gold jewellery is unlikely to come down, jewellers will have to look at other ways to meet their raw material requirement. The stage is set for a remake of ‘Once upon a time in Mumbai’