Tuesday, October 17, 2017


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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