We’re all aware by now of the import duties placed on both gold and silver in India, courtesy of the RBI.
For the third time this year, the RBI yesterday announced a further increase on import duties on the precious metals. Both gold and silver now carry a further 10% charge should you wish to import them. Gold price premiums are expected to rise above $100 on London prices.
We all know that this move is designed to cut the current account deficit. After crude oil, gold is the second most imported commodity in the country.
It is worth asking about the efficacy of these measures. The measures have not only impacted gold imports, particularly after the announcement of the 80/20 import and export restrictions, but they have made an impact far beyond numbers on a balance sheet.
A boost to unemployment
It has been estimated that there are around 2 million artisans involved in the jewellery industry. The All India Gems & Jewellery Trade Federation represents 300,000 jewellers and bullion dealers and has expressed concern for their welfare.
Depending on which reports you read, it is estimated that around 500,000 – 1 million of those in the industry could lose their jobs as a result of the imports.
One suspects that given the amount of gold estimated to be entering the country via illegal means, that not as a great a number of industry professionals will miss out on employment. Those involved in the export market are likely to suffer though as they risk raising questions from the authorities who may ask where the gold was sourced from.
A life of crime
Between April-June this year seizures of smuggled gold in India increased by 365%, gold seized amounted to Rs 598 million ($9.7m). Mumbai Airport alone accounted for Rs 93 million of this figure. The gold black market is now worth more than the narcotics industry.
At present officials believe that for every kilo of gold seized, 10-15kg successfully make it through. The statistics are only set to get worse as the country enters into wedding and festival season.
Customs officials report that poor labourers, based in the Middle East, are hired by organized gangs to smuggle the gold across borders. For this they receive just a few thousand rupees and a flight home.
But it isn’t just the poor who are feeling the urgency to get gold into India through illegitimate means. The managing director of a Singaporean jewellery chain was arrested a few weeks ago having been found to be smuggling gold in her lingerie.
It’s not just hidden gold on air passenger, a sea route between northern Sri Lanka and India’s Tamil Nadu Nagapattinam district is the passage gold smuggled from the Middle East, via Sri Lanka, is said to take. Last month four associates of a well-known money launderer were arrested having been caught smuggling 200 gold bars in a fishing boat.
Fellow gold lovers feel the pinch
In interesting articles from Reuters and Paul Ploumis, we read about the measures neighbouring countries were now taking in an attempt to calm the demand for gold from India.
Pakistan, Sri Lanka and Nepal have all seen significant increases in gold imports in recent months. One part of me is inclined to attribute this to the fall in the gold price and so, like China, citizens are using the opportunity to stock up on gold.
However, as we mentioned above it is clear that the increase in imports is directly linked to demand in India for smuggled gold.
All three countries have, or had, lower restrictions on gold imports than their bigger neighbour. Reports of smuggling from all three countries have appeared in the media in recent months, more than once.
Gold imports have been duty free in Pakistan for over 12 years but following a 386% increase in gold imports in the first half of the year, the Pakistan government was moved to ban them for one month. The surge was attributed to demand from India for smuggled gold, as Pakistan’s Economic Cooperation Committee noted the ‘unscrupulous’ use of the imported metal.
In Sri Lanka, Q1 2013 saw an increase in gold imports of 46%. In April gold imports totalled $50 million dollars. Following smuggling arrests the Sri Lankan authorities slapped a 10% import tax on gold hoping to put a stop to the arbitrage opportunity. ‘We have found some leakages and we want to prevent this,’ an official told Reuters.
Meanwhile in Nepal, import fees on gold were increased by 20%, from 3,000 rupees per 10 grams of gold to 3,600 rupees. This comes following the largest amount of gold seized in the country, last month Nepal police seized 35 kg of gold bars, smuggled over the border from China and bound for India.
Store wealth elsewhere?
The fight against gold and silver is not a fight against commodity importation, it is a fight between currencies. The Indian authorities want citizens to hold the rupee, but savers want something that holds its worth. The rupee continues to depreciate so they must turn elsewhere.
Despite government efforts, savers seem disinclined to use bank accounts. A recent Time article reported that of the 100 million bank accounts opened as part of a government drive in the last decade, most of them remain unused.
It will be interesting where they turn to. Gold, silver and platinum each now have 10% duties on them. India accounts for 10% of global diamond demand, but that is no longer an easy place to invest; polished diamonds have a 2% import tax, as of last year.
We believe they won’t turn elsewhere, it will still be about gold.
An increased desire to own gold
Officials hope that gold controls will eventually work to dissuade Indians from gold investment. But if anything it appears to have strengthened it, an undesired effect of the measures. Despite growing restrictions, July gold imports were $2.9 billion up from $2.45 billion in June.
As Bhargav Vaidya, a director at B.N. Vaidya & Associates, a Mumbai-based company which advises gold traders, points out; if people wish to own gold then they will get gold. He told Bloomberg, “We cannot preach religion to men with hungry stomachs…There are no supplies in the official channel just now. Smuggling will be on the rise and I hope we are not going back to the Gold Control Act days.”
The Gold Control Act is something we discussed last week, it was gradually removed as the government were unable to cope with the illegal activities surrounding gold. Given the digital age we now live in, the means individuals now have to gain access to gold, we believe this time around the government will have a much bigger problem in controlling gold smuggling.
A country does not accumulate over 8,000 tonnes of privately held gold, just ‘because’, they do so because there is no better savings alternative in their minds. If there is, it certainly isn’t offered by the government.
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