Restriction in Gold Imports May Lead to Increased Smuggling

June 7, 2013 at 07:18

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The government’s latest measures to restrict gold imports may lead to an increase in smuggling. Jewellers and bullion traders say that nearly 200 -250 tonne of gold may be smuggled into India this year following the Reserve Bank of India’s moves to check the metal’s shipments.

Talking to ET, Bachhraj Bamalwa, director of Nemichand Bamalwa, said, “According to Thomson Reuters GFMS report, India smuggled 100 tonne of gold in 2012. Market sources have indicated that this year the figure will increase to 200 -250 tonne .” Earlier this year, the government raised the import duty on gold and the method of calculation was changed to ad-valorem. Now the RBI has asked banks, nominated agencies and star trading houses not to import gold on a consignment basis for domestic sales. RBI has also insisted on 100% cash margin for letters of credit. The central bank has curbed credit by insisting that imports will be on ‘documents against payments’ as against the earlier norm of ‘documents against acceptance’. The restrictions were invoked after imports soared to 162 tonne in May from 142 tonne in April following weak international prices.

Bamalwa said, “Currently, smaller jewellers are paying a premium of Rs 500-600 per 10 gram for spot delivery of gold. Even then, gold is not available. This new set of rules will discourage banks to import gold and therefore there will be a shortage in the market. This will push up premiums.” He added the import duty, the value-added tax and premiums for spot delivery would only lead to a rise in smuggling. Gold traders indicated that retail prices may go up because the landed cost of the metal will increase.

Though the government tried to control the fall in rupee by introducing new strictures on gold imports on Tuesday, the slide could not be arrested. On Wednesday, it further depreciated to close at 56.72 against the dollar making the metal costlier. In the Indian market, the spot price of gold was hovering around Rs 27,200 per 10 gm due to a weak rupee. In the last fortnight, demand has dropped by 10%-14% across India.

Haresh Soni, chairman, All India Gem and Jewellery Trade Federation, said the new restrictions will dampen gold demand.

“There is uncertainty in the market due to thes erestrictions. Domestic jewellers will have to pay upfront to the bank which at times become difficult for them. Moreover, they will have to place orders with the banks in advance. If a sudden demand emerges due to falling prices, jewellers will not be in a position to meet it instantly. They will have to wait till banks provide the metal.”

Vinod Hayagriv, MD of Bangalore-based C Krishnaiah Chetty & Sons, pointed out that money bags can hoard gold through outright purchase.

“They will ask for huge premiums making gold costlier. And that will not help address the current account deficit. The government should not allow unregistered bullion dealers,” he said.