GOLD/DIAMOND IMPORTS ACTIVELY SUPPORT INDIAN
EXPORTS
LINK THESE IMPORTS TO INCENTIVIZE INDIAN
EXPORTS
TEJINDER NARANG
(COMMODITY ANALYST)
The general perception is that gold and diamond
imports are guzzlers of precious foreign exchange. This impression is totally
misplaced. If import and export of these
items of last six years is analyzed, then the trend that emerges is that there
is significant “value addition” when gold as jewllery is exported and rough
diamonds are shipped out as cut and polished diamonds. (Data is collated from Gems
& Jewllery Export promotion Council (GJEPC), sponsored by Ministry of Commerce.)
In respect of composite sector (chart 1)consisting of import of gold bars,
silver, rough diamonds, pearls etc. there has been consistent value addition
since 2012 rising to 34% in 2016 and around 23% in 2017. Likewise if gold bar
imports are considered in isolation, there is a steep value addition since 2015
touching 81% and at 104% in 2016 (chart 2). $4.15 billion of gold bar imports of 2015 have
yielded about $8.55 billion of exports; it equals net exports of $4.37 billion.
With surplus forex earning by the precious metal and precious stone sector,
notion of depletion or pressure in FX reserves due to their imports is erroneous.
Infact gold jewllery/ polished diamond exports etc. are
more than FX neutral. It could also mean that Indians household may be
using a major portion of recycled gold instead of relying upon fresh imports.
Total value addition by gold jewllery and
diamonds, pearls, precious stones etc. is about $26 billion in last six tears
or averaging about $4 billion per annum of FX earnings. This is the result of
skilled craftsman ship and efficient trading practices of import and exports where
price sensitivity is at its peak. Compared to that average annual export of $4
billion of Basmati rice is highly water and labor intensive including the use
of fertilizers—that is also imported.
Any policy action to restrict imports of
gold/rough diamonds will have parallel effect in pulling down exports. Indian
exports of gold/diamonds are about 13% of national exports in 2017 or about $35
billion (see chart 3). Thus there is a case for incentivizing such imports for
more exports. Here is a suggestion worth
considering for the policymakers.--
At a time when Indian exports are sluggish, why
not gold/diamonds import be linked to overall Indian exports!! Trade and industry are looking for incentive
to export. Conceptually all exports may be rewarded with a freely tradeable scrip
(named as “gold/diamond certificate of import”) of 10% of each Indian exports
in US dollar denomination. With about $300 billion worth of India’s current
export, 10% scrips would be about $30 billion. Since gold/diamond imports are
worth$30-$40 billion, such an entitlement will let earn the exporters some
market premium of 5-7%, depending upon import intensity of gold bars and rough
diamonds. Custom
duty on gold imports will then have to be made nil within one year of notifying
this facility.
Such a “gold/diamond certificate of import”
could be issued to the exporter by the bank through which export documents have
been negotiated and payment for realized. (Those who are not able to able to
import gold/diamonds by using such certificate may pay 20% “penal” duty for clearing their consignment.) This
duty free import scrip may be submitted to custom authorities at the time of
clearing gold/diamond consignments.
This mechanism will be self- regulating—as much
as –when Indian exports increase, the value/availability of these scrips will
also rise but their premium will come down –facilitating less costly imports of
gold and diamonds. The value addition in gold jewllery/polished
diamond export is more than sufficient to absorb this 5%-7% premium, though
currently re-export is available on zero duty.
The proposal is not a new idea but that existed
in 1997-98, when the DGFT used to auction “special import licenses” for gold
import on the basis of maximum premium offered by the bidders. Currently nominated agencies, including
prominent banks and select trading houses are importing gold. These agencies
too will have to acquire these import scrips from the market. Dollar
denomination of the scrip is suggested to lock the value so that stronger or
weaker rupee may not affect the intrinsic value of import.
Recently there have been controversies under
India’s FTAs with S. Korea and Indonesia that provided duty free imports-which
perhaps led to some of imports of gold being diverted through these countries.
If gold/diamond imports are made on the basis this certificate and duty reduced
to nil, such issues will automatically cease to exist.
Right now, with 10% import duty and 3% GST,
there is an arbitrage between prices abroad and Indian market-- that provokes
unofficial and illegal channels of imports. The above suggested scrip will
minimize that arbitrage and such activities.
At a times when jobs and business opportunities
are reportedly on the decline—this tradeable scrip will create a new market of
traders/brokers/commission agents and importers that would be atleast worth $1.5 billion in revenue to the benefit of exporters.
Gold/diamonds trade is supportive to the national
economy, and internationally too Indian skills& craftsmanship in jewllery
and diamonds are well recognized. Based on the evidence of imports and exports
of precious metals and precious stones, this trade deserves to be encouraged
holistically.
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