GOLD IMPORT MADE EASY--DESPITE CONTROLS

ANTI- IMPORT GOLD POLICIES—BETTER FOR INDIAN TRADE

Tejinder Narang

The parallel /shadow gold import system which also existed before 1991 when gold import was prohibited, has re-emerged. It is based on trust. Principle is cash and carry. With in-bound flows and local sales both shifting to grey markets, gold dealers are delivered metal at their doorsteps. Banks, Custom duty, sales tax matters are no longer a nuisances. Gold dealers are happier. Customers do not have to furnish PAN numbers above Rs. 2lakh ($3275)-thus better off.

For reducing Current Account Deficit (CAD), Indian Government was recently compelled to take some restrictive steps by hiking custom duty from 2% to 10%, on import of gold/silver, fixing 20% export obligations, deposting100% margin money with banks for opening letter of credits (LC).

In India’s socio-economic context, Gold is a unique commodity. Indian appetite for Gold is price inelastic. The more its import is restricted the higher is the arbitrage between local sale price and acquisition value in international market. Thus, greater is the greed and volume to import through grey channels. Controls should have reduced imports by financial and procedural roadblocks, but in reality they are rising.  Newton’s law is defied for Indian Gold demand—“Reaction is more than the action”.

About 30% of Indian GDP or Rs.33 lakh crores ($500 billion) exists as parallel economy. Domestic sale of gold has been and is mostly in cash or with No. 2 money. Indian inbound flow of gold is now recast and reincarnated via illegal channels, for which no accounting is required.

Harassment of seeking credit limits from banks, opening LCs, custom bonding, payment of import duty, “short” or “long” price fixation, finalization of rupee dollar rate of remittance through legal channels, sale tax liabilities etc are automatically dispensed at one stroke. Now gold dealers are delivered gold at their doorsteps. Purchase and sale is in cash without any records. No accounts/details to be furnished to sales tax and customs/DGFT. Happier times are here again. PAN number requirement is dispensed. No.2 money becomes much more easily convertible currency from paper to precious metal and back to paper. Thanks to Government’s intervention to correct CAD.

Small traders who were earlier at the mercy of Corporates and large bullion dealers will be able to manage overseas deals directly. “Shadow trade” of both import and local disposal is thriving and will be further supported by additional demand of festival season.

Let the Government be Content

The logic of Finance Ministry and RBI remains perfectly valid on paper. They have done their best to cut off non- essential bullion import and affected "accounting" reduction of about $50 billion in the overall deficit. Government has also innocently endorsed and well advertised its own worrisome concerns in FX resources by curbing such imports. Further, depreciation of rupee beyond Rs. 62 to a dollar is well confirmed. Stock market has also adjusted down by 800 points in a single day on 16^th August2013 to reflect worsening and weakening fundamentals of Indian economy as shares value discount/ recount the futures.

With economy in tailspin, who will bring FDI and FII in this country?? How local investments be encouraged in a failing system? Value of import intensity will ascend vertically- negating the effect of weaker rupee for pushing exports. Sure the CAD will widen and we may be worse off despite official gold import been negative in this year data sheet.

Bullion trade and Government have taken their own performing positions. Both are content in their own way. And the Nation is worse off. Introspect that curbs on precious metals do not work.  Now it is turn of the next Government to learn lessons from the past and sort out the mess.