The recent policies on the 20/80 ratio (requiring 20 per cent of imported gold to be used for exports) and the abolition of credit have ensured that gold imports in August, September and October have been a fraction of normal levels. So, the target will certainly be achieved in the 12 months starting August 2013.
However, with a 10 per cent customs duty on a commodity like gold and such complex procedures on legal imports it is natural that smuggling will increase, as it seems to have in the last few months. Three aspects confirm that this is indeed the case:
(i) the industry does not seem to be facing any kind of supply constraint, despite the crash in official imports;
(ii) incidents of smugglers getting caught have sharply risen; and,
(iii) there was a 6 to 7 per cent difference between the price at which you could import gold through the regular channels and the price at which gold was available in the local market.
Smuggling has to be funded by dollars outside India in exchange for rupee payments within India. This would mean that dollars that would otherwise have come into India will not come in now. Non-resident Indian (NRI) remittances would be a good part of these dollars.
If the situation continues, it is possible that actual imports (official and unofficial) could significantly exceed the 600-tonne goal and make the nation spend, directly and indirectly, more foreign exchange than we could have.
So how can the government create a win-win situation? Here are some suggestions:
1. The government should issue a licence equivalent to about 50 tonnes per month to all importers who have been importing gold, and use their track record to pro-rate their share of this 50 tonnes. We would end up capping the legal import into India at 600 tonnes through this mechanism.
2. The government should immediately remove the 20/80 procedures, which complicates legal imports significantly and consequently make other routes even more attractive, given that the official route does not meet domestic demand satisfactorily.
3. With steps 1 and 2, gold would flow freely into the country but only at the rate of 50 tonnes per month. And because it flows freely, the incentive for importing goal via the unofficial route will be reduced.
4. It would be naive and certainly impractical to think of reducing the customs duty since each one percentage point of duty fetches the government nearly Rs 2,000 crore of revenue. So, the price of reducing or scrapping it is perhaps too large to pay on the fiscal side. Instead, if we take a small percentage of the customs duty income and create a very attractive incentive programme for customs officers, it will make a large number of honest and vigilant officers even more so, creating an effective deterrent effect against smuggling.
5. The government should get the State Bank of India (SBI) (which is already familiar with the gold deposit scheme successfully targeting temples) to conceive and launch a visible and persuasive gold deposit scheme - with a catchy name and TV advertising - with a one- to three-year tenure for individuals. The government should define an annual cap of 200 tonnes for this scheme, to limit its effect on our current account deficit in the future since we will have to import later to pay these individuals back. As soon as we get traction on this scheme, the government should reduce the monthly licence limit from 50 tonnes correspondingly, so that total imports (current import for current consumption plus future import for current consumption) are together contained within 600 tonnes.
Many factors favour the success of this 200-tonne mobilisation. First, this amount is less than one per cent of total gold deposits in India and under 10 per cent of the likely coin/bar stock that customers can get back in the same form after the tenure of the scheme.
Second, at the 10 per cent current cost of financing gold to which the industry is getting accustomed, SBI will have enough to:
- give depositors a handsome return on their idle stock of gold;
- earmark a good sum for effectively marketing the scheme; and
- make a good return on its own investment and effort.
6. Finally, the government should bring in a regulation to temporarily ban the sale of coins and bars (it has banned their import but not yet their sale). And in their place, the government should introduce gold options that provide the same benefit (investment) to the public, without burdening the seller with the need to underpin the sale with physical gold. This means that the gold-investment market can thrive without the need to import gold for it.
Why should these steps create a win-win situation? First, the 20/80 rules make it quite complex for the smooth daily flow of gold into the country. This, combined with the 10 per cent customs duty, will continue to make smuggling very attractive (even necessary!) to feed domestic demand. Also, the unofficial supply can well feed the coin demand. The combined real flow of gold into the country could well exceed the 600-tonne target, though the concomitant reduction in NRI remittances can never be pinpointed. The government may congratulate itself on achieving its 600-tonne target but the reality may be something much higher. These suggestions will enable the industry to look at legal imports as the first option, thus making smuggling much less attractive, remove the coin and bar demand unequivocally, bring the total import bill (visible and invisible) under control and simultaneously make it easy for the industry to go about its work.
The author is CEO, Jewellery, Titan Company Ltd. These views are personal