Government eases curbs on gold imports, scraps 80:20 scheme

While entire gems and jewellery market was flummoxed about more gold import curbs to be imposed, Government surprised the sector with the removal of restrictive 80:20 scheme and by not raising the import duty on gold any further.

The Reserve Bank of India (RBI), in a surprise move, scrapped the 80:20 scheme on November 28. Introduced last year, the scheme prescribed any entity importing gold to re-export 20 per cent of it in value-added form. The official denied any new measure to curb gold imports, such as higher duty. Gold attracts an import duty of 10 per cent.

After the removal of the restrictive 80:20 scheme, the Centre has no plans to raise import duty on gold. Tax authorities expect the removal of restrictions on gold imports to not just curb smuggling but also boost tax collections. “The 80:20 scheme was an emergency measure to check the current account deficit (CAD). Now, when the deficit is under control, it has been scrapped,” a senior Finance Ministry official told BusinessLine. The restriction had encouraged six trading houses to corner a major portion of gold imports, affecting supply, raising the premium and causing hardship to genuine users.

Domestic players welcome the move

The removal of the stringent 80:20 scheme is a big relief for the domestic players of the country. The new development will put on hold to operational difficulties faced by the importers for more than a year now.  The 80:20 scheme had made the operations complex by combining imports with exports. As per the rule, importers had to provide 20 per cent of the imports for export purpose so as to avail the next lot of imports. Importers and domestic jewellery industry have welcome the development with open arms. Refinery and manufacturing bodies too stated that the development will remove all the operational hurdles and in turn help in getting raw materials easily.

There were apprehensions in the market about Government of India and RBI putting more restrictions on gold imports due to a recent surge in September and October import numbers. Despite of the high import bill in past two months, the Current Account Deficit (CAD) continues to remain under control. In addition to this, the oil and gold prices are in downtrend worldwide, thus the macroeconomic conditions are still stable in India. These developments helped Government scrap the 80:20 scheme and open the market for healthy business.

Satish Bansal from MD Overseas told Bullion Bulltein that while the operational difficulties will now be removed, the overall import figure for the current financial year may not shoot up. There was increase in imports recently out of concern that government may put some more restrictions any time. So now, only the genuine imports will happen and the premium level will come down. The trade will now be operated as per the market sentiment without further distractions. SK Jindal of Jindal group also welcomed the move stating that the parallel market trading will be reduced now. The efficiency of the trade will increase, operational cost will decrease and in the end, customers will get benefited.

Good news for consumers too

Ever since the 80:20 rule was introduced, gold prices in India started to quote at a premium to international prices. At one point, in fact, the premium was $110 per ounce.  But slowly as the demand dried and the government also reversed some of its restrictions on gold imports and allowed more agencies to import the metal, market premium on gold dropped. Currently, the gold premiums are at $5-6 an ounce. Now, with the 80:20 rule removed, this premium may also go. So, gold rates may come down a bit more for consumers.

Gold futures contract are expected to correct too as rupee is weak too. However, one needs to monitor international gold prices before placing their bets on yellow metal. In the last week of November, MCX gold futures dropped to `25,794, down 2 per cent. MCX silver futures closed at `34,527, down 4 per cent. Both MCX Gold and MCX Silver look bearish on the charts. But, they can move in any direction based on new developments this week. So, trade with tight stop losses. MCX Gold (`25,794) has support at `25,500. If this is cut, the contract can move to `25,300 or `25,000. Once below `25,000, the fall can be very quick. On the higher side, the first resistance is at `26,000 with the target at `26,500. MCX Silver (`34,527) has its support `34,500. If this level is cut again this week, it can move lower to `34,000 and `33,500. On the higher side, the targets are `35,000 and `36,000.

WGC foresees the move to improve supplies, benefit exporters

 The easing of gold import norms will improve the supply through official channels. Post the announcement, WGC said that such a move will benefit the genuine exporters and manufacturers of gold jewellery. Welcoming the move, WGC India Managing Director Somasundaram PR said, “The timing of this development though surprising, will definitely boost confidence in general, and in the jewellery industry, in particular.” The sharp rise in gold imports in recent months was not triggered by changes in demand estimates but was more likely due to expectation of additional curbs, he added.

Asserting that India should move beyond curbs on gold imports, Somasundaram said, “It’s time to re-engage all stakeholders to develop a coherent long-term policy on gold that is aligned to the nation’s growth objectives. It is imperative, that we find ways of mobilising and monetising the household savings embedded in gold stocks through the formal financial sector for the benefit of the economy as a whole.” The discussions must focus on how the industry can contribute to the country’s prosperity in the next five years, he added. WGC maintained that gold demand in India, the world’s largest consumer, in 2014 would be in the 850-950 tons range, slightly lower than last year.

 Easing gold import curbs will help boost growth, jobs

Import curbs imposed in 2013 has hampered India’s domestic jewellery industry in a big way. It is also responsible for gold smuggling in the country in past one year. The import curbs have also had a direct impact on jobs, growth and tax revenues as businesses had shrunk for jewellers. Thus, the revenues were reduced largely from legal gold imports.

Finance Minister Arun Jaitley recognized the impact of trying to repress the gold import demand and hence, took a decision of reducing the gold import curbs. According to a report in The Economic Times, gold imports soared nearly six-fold in October 2014 to 148 tonnes (over last year’s artificially low levels). This came on top of 39 per cent growth in September. On the other hand, the so-called export commitment was not too visible in the export data. The decision to ease gold imports is thus a welcome recognition of India’s gold domestic hunger and that artificially suppressing it cannot work.

Bullion traders are still uncertain

The confusion continues to pertain among the traders about the circular released by the Government on November 28. They are expecting further notifications to come in few days time. The traders have different takes on this announcement ad hence they need further clarity on the subject. Those who expect further clarification through subsequent circulars, mention that government may not open up the trade completely and may put other measures like quota system for gold imports.

There are still apprehensions in some quarters of the industry about the circulars came before August 2013(May and June 2013). They need further clarification as to whether the factors mentioned in earlier circulars will remain valid or otherwise. Lastly, the whole idea to impose 80:20 measure was to cut the yearly gold imports and in turn decrease the CAD level. Now that CAD is manageable, the government has removed the 80:20 in anticipation of helping the industry and decrease the parallel trade. But as customs duty for gold imports is still at 10 per cent parallel trade may not die-down yet.