Bullion dealers urge government to buy back gold from consumers

Worried over the finance ministry’s efforts to curb gold imports that may create long term negative impact on its availability in the country, bullion dealers have urged the government to allow banks to buy the metal back from consumers.

Currently, banks only sell gold to consumers in the form of coins and bars. But, once they start buying, even the government measures to restrict import would not hamper gold supply for domestic consumers, said Prithviraj Kothari, president of the Bombay Bullion Association (BBA), the Mumbai-based premier bullion dealers’ body.

In an attempt to control the current account deficit, the finance ministry has quadrupled the import duty on gold since the beginning of this year to four per cent in order to restrict its import into the country. With a sharp rise in the import bill and an economic downturn, India’s current account deficit (CAD) shot up to $78.2 billion (4.2 per cent of gross domestic product) for the year ended March 2012, from $46 billion (2.7 per cent of GDP) in the previous year. This is the highest level of CAD ever — both in absolute terms and as a proportion of GDP — according to the Reserve Bank of India (RBI).

For the quarter ended March, CAD rose to $21.7 billion (4.5 per cent of G DP), compared with $6.3 billion (1.3 per cent of GDP) for the corresponding quarter of the previous year.

Considering gold purchase as an unproductive asset, the association has proposed that the RBI should be asked to introduce an instrument with gold-like returns.

Meanwhile, the BBA on Tuesday made a few suggestions for the consideration of the government to bring India’s gold imports down.

“Rise in import duty has resulted in lower imports in 2012. But if gold prices declines in future, imports would pick up,” he told reporters on Tuesday.

Traders believe that bullion imports can be brought down without affecting the supply of bullion into the market through a series of measures.

To provide a long-term solution for curbing gold imports and controlling the country’s CAD, BBA proposes that banks should be allowed to hedge their exposure in bullion, need to introduce more options in paper products and a gold depository scheme.

Kothari opined that current norm for bullion exports from India calls for a value addition of 1.8%. Since bullion is the basic form (995 and 999 purity gold), such value addition is not possible, unlike a jewellery item where value-addition through workmanship, design are possible. At pure form (which is bullion), value addition over the London price is not possible. Hence, it has to be done away with, if export of bullion has to happen


 “Global players don’t know how much gold is being sold by the Indian market. They only see that India is importing, which would put India in a position to control price,” Kothari said.

In the last two years, China has outrun India in terms of gold demand. Despite this, India remains a celebrated player in the gold market.

Over 11,000 tonnes of gold have been imported in the last 15 years.

“This is sufficient gold to create depository compared to any depository elsewhere,” Kothari said.

There is over 25,000 tonnes of gold in Indian households alone. If the government starts a long term (for instance, a seven-year) deposit scheme with an annual incentive of 1-2 per cent, then the deposited gold can be brought into the market as recycled gold for a long term period, thus reducing the need to import gold from the international market.

Apart from this, BBA also proposed introducing more options in paper products like exchange traded funds.

He said that India’s gold imports would decline nearly 40 per cent to 200-250 tonne in the second half of the year owing to weak monsoon and rising prices.

Gold price in Mumbai’s Zaveri Bazaar went up by Rs 40 to Rs 30,090 per 10 gm on firm trend in global market.