Govt. considers easing Gold Import Curbs but not before March

Government had imposed gold import curbs when overseas gold purchases pushed its current account deficit to a record and undermined the rupee. However, Officials are now in favour to cut a record high import duty on gold and relax rules on exports, after the measures helped narrow the country’s trade deficit and now threaten to encourage smuggling. But, recently Economic Affairs Secretary said, the clampdown should continue to stabilize CAD that weakened the rupee against the US dollar last year.

The start of 2014 continues to remain gloomy as there is no relief for gold traders. Jewellers and traders were expecting ease in gold import curbs following the support of Reserve Bank of India chief, Raghuram Rajan and Commerce and Industry Minister, Anand Sharma. However, recently, Economic Affairs Secretary, Arvind Mayaram disappointed the industry by stating that : India should retain curbs on gold imports at least until March to stabilize the current account deficit (CAD) that weakened the rupee to a record low last year.
India had imposed the curbs last year when overseas gold purchases – the country’s second most expensive import after oil – pushed its current account deficit to a record and undermined the rupee currency. With three duty hikes last year to a record 10% and onerous restrictions tying purchases to exports, official arrivals shrank almost 90 percent in the six months to November, helping China displace India as the world’s top gold buyer.

Impact on Jewellery Sector
Gold imports fell to 19.3 tonnes in November from a high of 162 tonnes in May in the wake of a series of curbs by both the government and the RBI. These included raising customs duty on standard gold to 10 per cent from 2 per cent to restrict imports that bloated the current account deficit to an all-time high of 4.8 per cent of gross domestic product, or $88 billion in 2012-13.
Besides, in July, RBI had introduced an 80:20 scheme – 20 per cent of the bullion imported had to be exported back. Imports were also not allowed if importers were unable to meet the 20 per cent norm. The government also banned trading of gold in special economic zones. The measures had the desired impact of slowing down gold and silver imports to $25.5 billion in the first eight months of the fiscal, from $33.5 billion in the year earlier. As per the RBI, the CAD is likely to be in the range of $56 billion against the lifetime high of $88.2 billion in the previous year.

Indians are smuggling in more bullion than ever as buyers seek alternative sources of the metal, which is often given as gifts at weddings and festivals in the country. Between April and September, customs officials seized nearly double the amount of illegal gold taken in the whole of 2012. The World Gold Council estimates about 150 to 200 tonnes may be smuggled during 2013, on top of official demand of 900 tonnes. India’s official imports were 21 tonnes in November, down from 2012’s monthly average of 72 tonnes and sharply below the record of 162 tonnes hit in May, according to Thomson Reuters GFMS.

The supply crunch helped drive Indian gold premiums to a record high of $160 an ounce over London prices in early December, versus about $1.30 to $1.50 an ounce in Singapore.

The India Bullion and Jewellers Association Ltd (IBJA), an apex association located at the Zaveri Bazar, the epicentre of gold market in India, has been discussing the import duty hikes and 80:20 scheme at multiple platforms. IBJA President, Mohit Kamboj, the face of the association has been raising concerns over the declining gold market in India. He says, “800-1000 tonnes of gold were imported, but in the last quarter 25-30 tonnes of gold were imported. These imports cannot meet domestic demand for gold and it is clear that, for the supply of gold is now being resorted to smuggling. So the government is doing too much with the industry and gold traders have not hearing elsewhere.” The Government has failed to realise that gold policy changes have had a long-term impact on the gold market. Apart from gold shortage and high premiums on gold, many artisans have gone jobless too. This is an unrecoverable loss. Kamboj believes that Government is overlooking the gold traders’ woes as of now and taking their own time to come up with new policies. He recently said, “We expect new policies only after elections which should be beneficial for the gold markets.”

Some Government experts in favour of easing gold import norms
Few Govt officials are in discussions to cut a record high import duty on gold and relax rules on exports, government sources said, after the measures helped narrow the country’s trade deficit and now threaten to encourage smuggling. Jewellers, who estimate India’s monthly demand to be nearer 60 tonnes, have been asking for a duty cut to 8 per cent. Earlier it was touted that the decision to cut the import duty was likely to be taken anytime in January. With the current account deficit much reduced and little impact seen on the rupee from the U.S. Federal Reserve’s decision to cut back stimulus, the time may soon be right for authorities to make it easier for gold-hungry Indians to buy. The Fed trimmed its monthly bond purchases at the end of 2013 with little impact on the rupee. India’s current account deficit is now likely to be less than $50 billion in the year to March 31, 2014, down at least $20 billion from earlier estimates, the second source said.

Even the governor of India’s central bank, whose insistence that 20 percent of gold imports be exported as jewellery has hurt the most, has suggested there may come a time for change. “Once we feel more comfortable with the current account deficit, once we have a sense the tapering, at least the threat of it, is behind us, we will certainly consider unwinding some of these distortionary actions,” Raghuram Rajan said last month. He had also said smuggling would rise if curbs on gold imports continued for too long.

Advocating relaxation of gold import norms to check smuggling, Commerce and Industry Minister Anand Sharma said the government will take action at an appropriate time. “There is a mechanism to periodically review it (gold import norms). We will take an appropriate view as and when required,” Sharma told PTI in an interview. He said that the Government needs to ensure that the genuine demands are met and at the same time import is curbed to save foreign exchange.

Commerce Secretary S R Rao has also asked Economic Affairs Secretary Arvind Mayaram to consider easing the curbs to push exports. Planning Commission member Saumitra Chaudhuri has pitched for relaxation in curbs on gold imports citing improved current account deficit (CAD) and joining the growing clamour for easing restrictions on the yellow metal. “Government had imposed curbs on gold imports in May as a temporary measure. Since it has helped considerably in cutting down trade deficit, I think there will be an end to this either towards the end of this quarter or early next fiscal,” Chaudhuri said on the sidelines of a CII event.

Recently, United Progressive Alliance (UPA) Chairperson Sonia Gandhi also wrote a letter to the Government seeking relaxation of the import norms, including the 80:20 rule. In the letter to the commerce and industry ministry, she urged to look into the demand of the gems and jewellery sector for appropriate action.

P. Chidambaram favours continuation of curbs on gold imports
Notwithstanding the likelihood of the current account deficit (CAD) narrowing to less than USD 50 billion, Finance Minister P. Chidambaram appeals for continuing some kind of restriction on gold imports. “I think there should be some restraint on gold imports. We should also attempt to discover more gold in our own country,” he said in an interview to a news channel.

Referring to a recent Supreme Court judgement on auction of all closed mines, he said the Mines Ministry should sell the so-called closed mines because there are persons around the world who have met me and said, ‘Give us the mines and we would be able to extract gold.’
He said, “As a proposition, restraining gold imports is a correct move.”

Economic Affairs Secretary confirms import duty to stay till March
Recently, Economic Affairs Secretary Arvind Mayaram said that the clampdown should continue to stabilize CAD that weakened the rupee against the US dollar last year. “The government needs to keep the deficit low and should not tamper with the restrictions on gold shipments until at least to the end of the fiscal year on 31 March,” Mayaram told PTI in an interview.

India’s gold purchases slumped after the government increased the tax on imports three times in 2013 to 10%. The gap will narrow to about $56 billion this fiscal year from $88 billion in 2012-2013, the Reserve bank of India (RBI) estimates. “Gold imports have been identified by policymakers as a problem area because this is not some kind of productive imports,” said Siddhartha Sanyal, an economist at Barclays Plc in Mumbai. “Just because the numbers are favourable for the last few months, I don’t think they will change it dramatically. They are not in any big hurry to change it,” he added.

Premature Withdrawal
“The government may allow the deficit to stabilize for about six months before considering any relaxation in gold imports,” Samiran Chakraborty, head of regional research at Standard Chartered Plc, said in an interview with Bloomberg. Last month, RBI Governor Raghuram Rajan said, ““It would be premature to withdraw gold import restrictions now. Once we feel more comfortable with the CAD, once we have a sense that tapering, at least the threat of it is behind us, we will certainly consider unwinding some of these distortionary actions.”
The government is seeking to cut gold imports to 800 metric tonnes this financial year from 845 tonnes a year earlier. Imports totalled 423 tonnes in the six months through September, according to the World Gold Council. The regulations spurred a rise in smuggling and pushed premiums that jewellers pay to importers to a record $160 an ounce over London price last month.

“Although one would never encourage smuggling to happen, cost of this compared to the cost to the exchequer, or to the country from a higher current account deficit, if you evaluate the two, probably one would say the cost of higher current account deficit is larger,” said Chakraborty. Consumption in India, which imports almost all the bullion it needs, accounted for about 20% of global demand in 2012, according to data from WGC.

RBI partly eases gold norms
The Reserve Bank of India partly eased the restrictions on import of gold dore by allowing refineries to import 15 per cent of their gross annual requirement in first two months and remaining as per export performance. Refineries are allowed to import dore up to 15 per cent of their gross average viable quantity based on their license entitlement in the first two months for making this available to the exporters on First in First out (FIFO) basis.
“Subsequent to this, the quantum of gold dore to be imported should be determined lot-wise on the basis of export performance,” RBI said in a communications to banks. The step was taken after Government and RBI have been receiving representations related to import of gold dore due to 20-80 principle. The central bank further said before the next import, not more than 80 per cent should be allowed to be sold domestically.

“The dore so imported shall be refined and shall be released based on FIFO basis following 20:80 principle,” RBI said. Amid widening Current Account Deficit and sliding rupee, the both RBI and Government had imposed curbs on gold imports. Under FIFO methodology, the oldest entry,
or bottom of the stack, is processed first.