Millennium Post

Smugglers take glitter off gold

Chakravarthy Rangarajan, who authored the official report recommending gold decontrol 25 years ago at the instance of the Rajiv Gandhi government and has been amply rewarded ever since, appears to be a much disturbed person these days. His report led to the abolition of the Gold Control Act of 1962 and helped this poor country indulge in the big luxury of importing larger and larger quantities of gold year after year until it had worn the uncomfortable crown of being the world’s largest gold importer since 2010 with an all-time record volume of 1,006.3 tonnes as per the World Gold Council data. The council record showed India imported 933.4 tonnes of gold in 2011 as against a government estimate of 969 tonnes. The increasing demand of gold from India and China, the second largest importer of the yellow metal, has led to a constant rise in gold prices since 2008. As a result, despite a lower volume of gold import by India in 2011, the value of import, according to Rangarajan, reached an all-time high $ 60 billion.

The situation has suddenly altered. India’s gold import during the first half (April-September) of the current financial year had dropped to 220 kgs as against 407 kgs in the corresponding period, last year, apparently due to higher import duty at four per cent as against two per cent earlier. In value terms, it stood at $16.47 billion during April-September last against $30 billion for the same period a year ago.  But, these official import figures don’t reflect the reality. Smugglers are reportedly bringing large volumes of gold using land, sea and air routes like in the past to pump in cheaper gold in the Indian market to meet the demand of the rich. Rangarajan, now the chairman of the Prime Minister’s Economic Advisory Council, is naturally unhappy and worried. His famous report on gold decontrol aimed at attacking the smugglers’ raj in gold is proving to be partly futile. This could hardly be to the comfort of octogenarian Rangarajan’s official cord with the government which has continued non-stop at first as RBI deputy governor and, thereupon, RBI governor, governor of Andhra Pradesh and two other states, finance commission chairman, Rajya Sabha member and, now, PM’s chief economic advisor. Rangarajan appears to be concerned once again over the rise in smuggled gold arrivals.

But, what are those men in the whites (customs and their preventive anti-smuggling squad) doing about it? According to the union finance ministry, Rs 942 crore worth of gold was seized in more than 200 cases of smuggling detected during the April-July period alone this year - a 272 per cent increase over the level in the same period, last year. It was an aberration too. As per Directorate of Revenue Intelligence (DRI) records, gold seizure between 2006-07 and 2010-11 was practically insignificant. The gold seizure at the Mumbai airport was of course from usual suspects, passengers on flights from Singapore and Dubai. If the value of the seized gold represents as much as a  standard five per cent of actual smuggling, which has been reportedly taking place through Sri Lanka, Singapore, Hong Kong via Nepal, Abu Dhabi and Bahrain, the value of smuggled gold that might have illegally entered the Indian soil through more daring and leak-proof operations would be worth about Rs. 19,000 crore in just four months. Payments might have been made through hawala transaction or black money held abroad. The nature of smuggling reminds one of the situation prevailing in the 1960s, ‘70s and ‘80s, when smuggled gold used to be transported into India in mechanised fishing vessels and Dhows from West Asian gulf countries to mostly along the coast of Ratnagiri in Maharashtra.

While it is for the investigation and prosecution wings of the union finance ministry dealing with smuggling and hawala transactions to act in more vigorous and coordinated manner to deal with the recent spate of gold smuggling into India, the lower official import of gold and higher import duty should have a positive impact on CAD and indirect tax collection, partly meeting the twin objectives of the current year’s budget. With CAD (that is: total imports of goods, services and transfers minus total export of goods, services and transfers) widening to an all-time high of 4.2 per cent of GDP in 2011-12, a worried government raised basic customs duty (BCD) on standard gold bars and platinum bars from 2 per cent to 4 per cent while on non-standard gold, it was doubled to 10 per cent in the current year’s budget. BCD on gold ore and concentrate was also raised to 2 per cent from 1 per cent to reduce gold import. As a result, according to RBI, non-oil imports declined by 9.4 per cent at the end of the first half of 2012-13, largely due to a significantly lower imports of gold.

It has been acknowledged by the customs that the hike in duty has led to more collection. It could have been higher if not for the spurt in smuggling. Customs duty collection from gold stood at Rs 3,245 crore for April-September this fiscal as against Rs 1,509 crore collected during the corresponding period, last year. To contain CAD, apart from raising the custom duty on gold, the RBI also restrained gold loans by Non-Banking Finance Companies (NBFCs). It has asked them to maintain a loan-to-value ratio not exceeding 60 per cent for loans granted against the collateral of gold jewellery. Depreciation of rupee has also helped to a large extent. Meanwhile, the Bombay Bullion Association has forecast 2013 gold import to be around 550 tonnes. The total official import of gold this year may be down by 42-45 per cent from the 2011 level to 532 tonnes. Of last year’s gold import bill of $ 60 billion, nearly $ 20 billion worth precious metal were said to have been imported by individuals and institutions to hedge against inflation-linked losses and falling exchange value of rupee.

Over the years, large arrivals of the precious metal helped the Indian rich to easily hide a portion of their unaccounted wealth in gold jewellery, gold bars and gold coins without having to go through the hassle of a more risky hawala route to stash black money in global tax havens and Swiss banks. Ironically, the central body of the World Gold Council, which has been extremely active with Bombay bullion merchants, is also based in Switzerland (Geneva).

The government has to do more than making a small increase in import duty on gold for domestic consumption, which encourages black money conversion. The customs, DRI and income tax department must form a unified cell to track domestic gold hoarders, legally or illegally, and
penalise importers with both high tariff and non-tariff barriers to save the nation and the value of its
currency. (IPA)
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