Import curbs just raised smuggling and little else
With the World Gold Council data showing a sharp hike in gold purchases in the UAE in the last quarter, it is evident that India’s import curbs and high import duties have opened up a lucrative business for smugglers—gold from the UAE was basically being channelled into India. To that extent, RBI has done the right thing by liberalising rules for importing of gold by star/premium trading houses and allowing banks to provide loans to domestic jewellery manufacturers. Indeed, the government would do well to remove the current 80:20 restrictions—20% of gold needs to be exported—as well as lower the current 10% import duty levels.
As finance minister, P Chidambaram clamped down on gold imports in order to save the CAD which was totally out of control. But as this newspaper pointed out even then, gold imports were taking place because the economy was doing badly and because gold prices were appreciating globally, making it the perfect investment. When gold imports started falling in FY14—their fall from $53 billion in FY13 to $29 billion in FY14 is what allowed the current account deficit to fall from $88 billion to under $37 billion—the finance ministry took it to mean its measures were working. The main reason why gold imports fell, however, was because gold prices collapsed internationally with the US economy beginning to look a lot better and Europe appearing less on the brink of collapse. When gold prices rose from $1,025 per ounce in FY10 to $1,295 in FY11, it was not surprising that gold imports into India too jumped from 867 tonnes to 976 tonnes. As international gold prices kept rising, to $1,645 in FY12, gold imports also jumped to 1,076 tonnes or $56 billion—that means, almost half of the worsening CAD in FY12 was on account of the increase in gold imports. Since gold prices fell just 7% in FY13, things didn’t change too much—gold imports fell around 4% in dollar terms, but they still remained a significant 60% of the year’s CAD. All this, by the way, was happening even as import duties were being hiked.
In 2014, however, gold prices collapsed a fifth as the global recovery gained strength, from $1,669 per ounce to $1,330. Immediately, gold imports into India also collapsed by over a third and the import bill fell from around $54 billion in FY13 to $29 billion in FY14. Given the forecast of gold prices remaining low in FY15—$1,250 per ounce versus $1,330 according to the latest Citi Research forecast—it isn’t likely gold imports are going to boom, more so if the Modi government is able to revive the economy. Just the right time to lower import duties and remove remaining restrictions.