Freer gold imports will help rid us of smugglers

The government expected this would bring down consumption of gold and hence its imports, and help preserve precious foreign exchange.
Image used for representation
Image used for representationExpress illustration | Sourav roy

The recent arrest in the Delhi airport of a duo, one of them a part-time aide of Congress MP Shashi Tharoor, has once again revived the exciting discussion on ‘gold smuggling’. Tharoor’s aide, one Shiv Kumar Prasad, who seemed to have an ‘aerodrome’ pass that allowed him access to the airport’s security area, was caught receiving 500 grams of the precious metal from an associate who had just landed.

After the Gold (Control) Act, 1962 was abolished as part of the government’s liberalization package in 1990, and gold was allowed to be imported freely, gold smuggling became passe. Now, with a steady rise in import duty, gold smuggling has become lucrative again.

Another recent case that brought the spotlight back on gold smuggling was a seizure in July 2020 of 30 kilograms of 24 carat gold worth Rs 15 crore from a diplomatic bag destined for the UAE Consulate in Thiruvananthapuram. The seizure and arrests exposed the sophisticated nexus between politicians, diplomats and the smugglers.

Troubled history

India has had a troubled history with Gold. The government realized the hard way that owning the precious metal is so intrinsically tied to the Indian psyche that no legal controls can restrict the appetite for gold. It started with the Gold (Control) Act 1962. It was promulgated during the crisis with China and the early years of foreign exchange shortage, and the fiat recalled all gold loans by banks and banned forward trading.

Subsequent legislations in 1963 and 1965 banned production of gold jewelry above 14 carat fineness and a gold bond scheme was launched to mop up private gold holdings. Then came Prime Minister Morarji Desai’s Gold (Control) Act in 1968, which barred citizens from owning gold in the form of bars and coins. All existing holdings had to be converted to jewelry.

The government expected this would bring down consumption of gold and hence its imports, and help preserve precious foreign exchange. It was an unsustainable absurdity. What happened was the government killed the official gold market, but instead created a booming black market. While the mafia thrived, the poor, small artisans of the Sonar community were rendered penniless.

By 1990, India was ready to dismantle its License Raj. The Gold Control Act was repealed on 6 June, 1990. Then Union finance minister Madhu Dandvate opened up gold imports on payment of a duty of Rs 250 per 10 grams. The philosophy shifted to allowing free imports so that some taxes came to the government, rather than losing it all to the smuggler mafia. From almost no official imports in 1991, India imported 110 tonnes of the yellow metal in 1992.

Regressive taxation

Today, India imports as much as 800-900tonnes annually valued at about $40 billion, but with the demand at about 1,000-1,100 tonnes. The 20% or about 200 tonnessupply gap is made up with smuggled gold as there is considerable profit in the arbitrage. This is because from near negligible customs duty of Rs 250 per 10 grams in 1990, import duty has been rising steadily. In the FY2024, import duty was hiked on gold and coins of precious metals to 15% from the existing 10%. This includes basic custom duty of 10% and Agriculture Infrastructure and Development Cess (AIDC) of 5%.

These higher taxes have given a fillip to new, and more sophisticated smuggling syndicates. It’s a mass operation with airports like Chennai, Kozhikode, Kochi, Mumbai, and Delhibecoming the main hubs for entry. Department of Revenue Intelligence (DRI) figures show gold seizures around Rs 4,000 crore in FY2024, which is just about 5% or the tip of iceberg of the $10 billion ‘smugglers’ market.

Demand for gold is also volatile and influenced by a variety of factors. In India, as elsewhere, it is seen as a hedge against inflation and crisis. Currently, with two active theatres of war – in the Ukraine and in the Gaza strip – there has been increasing demand for the yellow metal as a less risky diversification from other asset classes.

Another important point of demand is gem and jewelry manufacture. The jewelry manufacturers import almost all their inputs – diamonds, and other precious stones as well as gold – but at the same time are bigexporters of valued-added jewelry – a gain for the country. In FY2024, though there was a dip in exports by 12% from the previous year, the industry still did well to notch up $32 billion in outbound sales.

In this scenario, and considering shortage of foreign exchange is no more an issue, the government should take a relook at its customs duty policy. Import duty is usually calibrated to protect local manufacture. In this case, there is hardly any domestic gold production. Dubai and Singapore, with their zero-duty policies, have made these countries a gold hub, attracting heavy transit traffic and gaining in secondary trades.

The loss in tax by reducing customs duty will be more than made up by the volume that will increase in legal imports. Gold smuggling has only reared its head because of the arbitrage opportunities. If the gap in prices is closed between Dubai and Mumbai, there will be no incentive for smuggling.

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