Thursday, May 29, 2014



BRIEFLY-- Let gold be imported by private entities freely and be re-liberalized. Public sector undertakings like MMTC, STC, Banks should not be the promoter of gold import by” fronting” for private parties at a loss and high risk.

Tejinder Narang
In 2012-13, bullion Imports climbed to $54 billion and CAD (current account deficit) to about 4.7% of GDP. To cap CAD within tolerable limit of 3% in 2013-14, policy pundits attempted to trim imports of precious metal by raising import duty to 10% from 2% and imposing 20% jewelry export obligation. Only 80% is permitted for domestic usage.
These measures curtailed CAD to $29 billion in FY14 (1.7%% of GDP) but hiked premium on Indian prices by $120- 150 dollars per troy ounce (or per 31 gram approximately) making shady transactions / illicit channels very lucrative.    
Ascension of CAD in FY13 is attributable to multiple constraints and not bullion alone--e.g. lack of FDI and FII inflows; banning iron ore exports / prohibition in wheat/rice exports till 2011/slowdown in other exports. Briefly—dollar inflows declined.
Simultaneously, import of precious metals through nominated PSUs and banks intensified forex outflows. Former Finance Minister was the first to advise official agencies to halt precious metal imports.
PSUs and Indian banks provide significant financial comfort to overseas sellers especially when import is undertaken on “consignment basis”.  Normally private trade should be importing directly without “fronting” PSUs and banks, by establishing letters of credits on sellers abroad. By routing trade via Government agencies, private entities shift their risk profile from international contracts to domestic agreements which can be managed with relative ease in case of defaults due to laxity in enforcement and systemic flaws in Indian legal framework.    
Bullion bloats turnover  
MMTC/STC /PEC/ authorized banks are government’s nominated channels for import of precious metal. In FY13—“sales turnover” vs “bullion import” (ratio) of these three trading parastatals was—MMTC, Rs.28600 crores vs Rs.13675 crores (60%); STC, 18700 vs 11250(60%); PEC, 11650 crores vs 1275 (11%) crores. In FY12, MMTC imported about Rs.51000 crores of precious metal vs total business of 66000 crores—about 77% of this company’s trading volume.
Import is undertaken for private trade on back to back basis agreements on consignment basis with some margin money (advance payment of 10%-15% apprx)-- which insulates PSUs from price volatility and dollar/rupee fluctuations. PSUs earning are generally a meagre 0.1% or even less. Trader’s profits or losses depend upon speculative positions. Gold import gives PSUs and banks the benefit of bloated turnover but almost nil profitability. (However PSUs earned 4%-5% in 2013-14 through “special quota” allocation for import of gold by DGFT in November- December 2013- as an exceptional and rare year.)
Thanks to the Modi wave, RBI restored imports through select trading houses and jewelry manufacturers on 21st May 2014. Insistence of import/export ratio of 80:20 still remains. Even this irritant may be lifted soon.  With likely re-liberalization in the very future and higher GDP growth, these three organizations are likely to push imports to Rs.65-75000 crores ($11-$13 billion) or more in FY15 from Rs 25000 crore ($0.42billion) in FY14, at nominal service charge of maximum 0.10% versus operating cost of 0.5%-1%. This also amounts to subsidization for bullion traders. The same may be the case for banks as well for service charges.
High Risk and losses
In the event of loss making situations, bullion traders deftly breach back to back agreements.   MMTC has transparently recorded transactional loss of Rs 244 crores ($42 million) on bullion trade in their FY13 balance sheet, that wiped out profits of last three years import of Rs.1,14,000 crores ($20 billion) from 2010 to 2013 and pushed it into net loss of Rs 70 crores last year. There could be many cases in other PSUs and nominated banks of under recoveries/losses or litigation pending for final conclusion which may be unreported. Government has to view as a policy whether such an enormous value of exposure, with inbuilt risk, is borne by PSUs and banks for the privates at almost next to nothing return or to build some additional safeguards.   
 Primary areas neglected
Neglect of primary areas of trade stands fully exposed by major PSUs, reflecting lack of international trading activities in commodities except precious metals.  The new Government will do well to lay stress on their primary mandate. Principle of cost-benefit-risk- reward may be weighed viz-a viz commodity trading and bullion imports, and applied accordingly. Ideally the performance of these PSUs should be evaluated on non- bullion business.
For ensuring quality of metal imports by privates, all the government has to do is to stipulate that bars should be of “London Bullion Market Association (LBMA) Good Delivery List” which represents de facto standard for the quality. Let business deal with business and not the Government.  Recall —minimum Government, maximum governance!!


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