Ghost of 80:20 gold import scheme resurfaces
In May 2013, the Reserve Bank of India suddenly issued a circular imposing a new restriction in gold sales, telling banks not to import gold on a consignment bases.
Instead came what is termed the 80:20 scheme. Of any import lot, 20 per cent was to be reexported, went the order.
On Monday, in comments on the massive fraud at Punjab National Bank, involving Gitanjali Gems and billionaire jeweller Nirav Modi, Union minister Ravi Shankar Prasad alleged the 80:20 scheme (It was scrapped in November 2014, a few months after the present government took charge) had enabled the scam. Bullion market commentators have more criticism — that the scheme itself, aimed to control a factor for India's ballooning current account, was a big failure. That there were many Gitanjalilike players, who creamed the benefits. Examples are quoted, for instance, of a government-owned bank, having high levels of nonperforming assets, being instructed to sell gold to a particular jeweller-refiner at a specified premium.
The scheme was introduced when import of gold was flourishing and the country's current account deficit was rising, resulting in a sharp fall in the rupee's value against the dollar. Following government consultations (or instructions), the RBI issued its July 2013 circular. Any gold import was subject to reexport of 20 per cent, with other conditions.
Import of gold in April and May 2013, prior to the restrictions was 294 tonnes (~770 billion or $14.4 billion); that level remains a record high. Total gold import in the following 10 months of 2013-14 was 325 tonnes.
In January 2012, the import duty on gold was ~300 per 10g; it had been raised to 10 per cent of value by August 2013. Since this and like measures didn't work to curb demand, the government took the decision to restrict import. The immediate beneficiaries were smugglers; there was a huge shortage and they got the 10 per cent duty margin, plus a premium. Smuggling was not a significant issue prior to 2012.
Subsequently, several clarifications issued on 80:20 complicated the scheme. A source who studied the implications said, “If export increased, future eligibility to import for the domestic market was higher and, hence, ignoring value addition norms, certain export houses were exporting on the same day of import, which was nothing but round tripping.”