Monday, December 8, 2014


  1. This article was written on 22nd November2014 when Finance Ministry was contemplating curbs on gold imports. 
  2. Then, rather abruptly, on 28th November GOI changed its position to unfetter gold import from 80:20 (gold: jewellery export policy) and allow 100% import with 10% duty.  This writing was thus withdrawn from publishing.
  3. The reasons for the GOI easing bullion import could have been anticipated redcution in CAD due to steep fall in crude oil values.
  4. Had 80:20 policy been continued it could have meant extended patronage to six select trading houses, which would have been extremely controversial.
  5. RBI statement also read that softening of policy was done as per the directions of GOI.
  6. Blogged for the purpose of record only.


Let gold importers buy exchange from the exporters.
Tejinder Narang
When Government contemplates curbs on gold import, it creates demand expansion and high premium in the market. When the Government hints at lifting restrictions on gold import, it results in demand contraction or signals that prices might taper. Thus recent media reports of enforcing restrictions in bullion import are sure to enlarge expectational demand rather than diminish it. That is the logical explanation.
At the same time, markets are illogical and irrational because they are driven by speculation, sentiments, savings, security, infatuations, returns greed and geopolitical tensions etc. It is difficult to perpetuate a policy under such varied complexities. Most of Governments attempt to control and police the markets but fail.
Interventionist measures taken so far by Indian Government since 2011-12 –by progressively hiking duty to 10%; then to introduce 80:20 import/export ratios through nominated agencies, and thereafter opening imports through select trading houses-- though provided short term window dressing on CAD or faked CAD as James Mecklai mentioned a few days back in this paper,   but have also encouraged illicit shadow trade, use of black money stashed abroad or diversion of likely remittances which the NRIs would have made. It also prompted private trading house to increase the cyclic velocity of import and export. In September alone $4billion or about 100 tons of gold landed in the country. Net effect is that country’s import has averaged 860 metric tons in 2011-15, notwithstanding the multiple tweaking in policy formulation. 

  The reportedly unnamed six trading houses that satiated the market demand may be exposed to uncomfortable questioning of multiple agencies for accelerating imports in the starved market and for exposing the country to critical zone of CAD. RBI, Banks, Government/customs officials, security and handling entities may be—rightly or wrongly probed. Matters will be dragged to courts for interminable litigations.  
At the macro-policy level the general perception that “all actions or decisions of the Governments are right” has to be “doubted”. Presumption that policymakers-- whether of UPA or NDA-- can take a perfect or nearly perfect view or have rational assessment of bullion market is grossly erroneous. When CAD fell to 1.7% of GDP in 2013-14 to 4.7% in 2012-13, all were ignorant of repressed demand of gold.
The word “estimates” has a very wide connotation. “Estimates” of smuggled gold assessed by authorities are approximations of wide variations or guess-estimates. Thus if the officialdom was trying to contain unreported large imports by easing imports through select trading houses, the estimates proved to be wrong as actual illicit imports may be much lower. How can unreported imports or illicit trade is transparent?? The sharp spike in gold inflows in September/October 2014 largely through select trading houses re-affirms that decision making process may have relied upon flawed data. Thus Government must judge itself on the propriety of its own policy profiles.
PSUs and banks—nominated agencies-- are not keen to pursue 80:20 policies because they shun nuances of jewellery trade. First they know little about it and second, they may be conned by export of jewellery of unreliable quality and value; third when India happens to be the largest jewellery market, insistence on export of jewellery is an agnostic approach riddled with self-contradiction. By thrusting 20% jewellery exports prior to import of second tranche, recycling of melted gold of jewellery in Dubai/Bangkok and its subsequent import in the form of bars cannot be ruled out. Thus market premium of gold gets inflated which supports shadow trade.
In this environment full of contradictions, Ideally the government should maintain the policy prescription of 2011-12 with 2%-3% duty through nominated agencies only. If Government still wishes “to do something”, then it should  let the foreign exchange be earned by the bullion importer before opening the letter of credit and disengage  nominated agencies.
Indian GDP is $1.8 trillion. CAD is to be contained to 3% of GDP or about $54 billion from high of 4.7% or $85 billion. The reduction sought is $85-$54=$31 billion. Indian export is around $314 billion in 2013-14. 10% of this export or $31 billion can be harmonised with bullion import. The concept is that a bullion importer will purchase foreign currency or USD from exporters by paying a market determined premium.
 All exporters are issued 100% Bank realization Certificate (BRC) by the Banks-- a documentary receipt—for having realized export proceeds against their invoiced shipments.  All the finance Ministry/RBI needs to do is the following-- 
a)      Banks can be asked to issue “split” Bank Realization Certificate (BRC) in —say for value of 10% and 90% to all Indian exporters of “any” commodity/equipment/services in twin copies—one for exchange control and others for custom controls. 10% BRC can be named as Bullion Bank Realization certificate (BBRC).
b)       Indian exporter has the “discretion” to trade (sell) 10% BBRC to a bullion importer/trader for import of gold at a market determined premium by endorsement, which will incentivize exports and cannot be deemed export subsidy.
c)       Import LC for bullion import can be established by the bank upon surrender of the 10% BBRC by importer. Custom copy of BBRC can be submitted at the time of clearance from airport.
d)      All banks may make available data of availability of BBRCs with the exporters on their website.
e)      This will eliminate the element of discrimination to select parties.
Many Indian exportable items are today out priced internationally or exporters are working on razor thin margins. Depending upon the demand intensity of gold import, the premium on BBRC will be calibrated. This will stimulate higher exports without any subsidization. Gold import will be foreign exchange neutral and CAD well under 3% of GDP


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