GOLD TRUMPS GOV­ERN­MENT

Curbs on gold im­port have brought down the trade deficit dra­mat­i­cally. But yel­low metal prices have soared, which has hurt fes­ti­val sea­son sales and fu­elled smug­gling.

India Today - - BUSINESS - By M.G. Arun With M.G. Rad­hakr­ish­nan, J. Bin­duraj and Banu­mathi K. Fol­low the writer on Twit­ter @Mgarun1

On Septem­ber 19, two burqa­clad women ar­rived at the Kochi in­ter­na­tional air­port from Dubai at 6 a.m. on an Emi­rates flight and calmly made their way to­wards the green chan­nel. With a child in hand, they could have eas­ily passed off as typ­i­cal home­com­ing pas­sen­gers. But act­ing on a tip-off, cus­toms of­fi­cials caught them, lead­ing to the seizure of the big­gest-ever gold haul at an In­dian air­port, com­pris­ing 20 one-kilo gold bars worth Rs 5.8 crore, tucked away in spe­cially stitched jack­ets in­side their burqas.

This was not an iso­lated event. As much as 60 kg of gold has been seized from Ker­ala’s three in­ter­na­tional air­ports—Kozhikode, Kochi and Thiruvananthapuram—since March this year, an all-time record. Hid­den gold in bars and bis­cuits were found in lap­tops, bat­tery cav­i­ties of cell phones, emer­gency lamps, knee caps, ab­domen belts worn by pas­sen­gers or con­cealed in the body.

On Oc­to­ber 22, gold bars worth Rs 90 lakh were seized from three pas­sen­gers at the Hy­der­abad air­port. On Oc­to­ber 7, po­lice re­cov­ered 20 kg of gold bis­cuits from the lava­tory of an Air In­dia flight in Chen­nai and ar­rested five peo­ple who had tried to smug­gle it in from Dubai. On Septem­ber 21, a pas­sen­ger from Sin­ga­pore was held for smug­gling into Chen­nai 21 gold bis­cuits worth Rs 59 lakh. In Au­gust, there were three seizures at Goa’s Dabolim air­port. Two Sri Lankans and an In­dian were caught car­ry­ing 4.12 kg of gold val­ued at Rs 1.33 crore. Since Jan­uary, cus­toms au­thor­i­ties in Goa have net­ted gold worth Rs 2.66 crore. Gold smug­gling through New Delhi’s in­ter­na­tional air­port in 2012-13 was up five times com­pared to the year be­fore.

CHOK­ING IM­PORTS

In­dus­try sources say smug­gling via air­ports is mi­nus­cule when com­pared to what is sneaked in via the sea route and In­dia’s por­ous bor­ders with Nepal and in West Ben­gal and Ra­jasthan. As much as 60 tonnes of gold is es­ti­mated to have been smug­gled in since April this year. In a coun­try that im­ported be­tween 800 and 900 tonnes of gold in 2012-13, an ad­di­tional 200 tonnes was brought in il­le­gally.

RBI Gov­er­nor Raghu­ram Ra­jan ad­mit­ted on Oc­to­ber 29 that gold smug­gling was up “sig­nif­i­cantly” and had to be pre­vented from snow­balling into some­thing big­ger. The rea­son for the rise in gold smug­gling is not hard to find. Be­tween Jan­uary and Septem­ber, the Gov­ern­ment, with the aim of curb­ing the ris­ing cur­rent ac­count

deficit ( CAD), i.e., the dif­fer­ence be­tween in­flow and out­flow of for­eign cur­rency, hiked im­port duty on gold on five oc­ca­sions, tak­ing it up from 1 per cent at the be­gin­ning of the year to 10 per cent. It has also hiked im­port duty on jew­ellery to 15 per cent while RBI spec­i­fied that 20 per cent of all im­ported gold has to be ex­ported as jew­ellery. Th­ese mea­sures choked gold im­ports, which fell to $0.65 bil­lion in Au­gust com­pared to $2.9 bil­lion in July, when In­dia im­ported 47.5 ton- nes. A fall in gold and oil im­ports helped nar­row In­dia’s trade deficit to a 30-month low of $6.76 bil­lion. This may help sta­bilise the ru­pee, the Gov­ern­ment said on Oc­to­ber 9.

The Gov­ern­ment also wanted to boost ex­ports, which had fallen 50 per cent to $561 mil­lion in Au­gust. Ac­cord­ing to Ra­jiv Jain, chair­man of Jaipur-based Samb­hav Gems and for­mer chair­man of the Gem & Jew­ellery Ex­port Pro­mo­tion Coun­cil, while In­dia’s over­all gold im­ports were worth $40 bil­lion in the last fis­cal, ex­ports were just $10 bil­lion. Eco­nomic Af­fairs Sec­re­tary Arvind Ma­yaram re­cently said In­dia’s to­tal im­port of gold could be well be­low 750 tonnes in the cur­rent fis­cal, about 11 per cent less than last year, as a re­sult of all the curbs.

FES­TIVE DAMP­ENER

The in­dus­try has been ex­pect­ing a higher de­mand for gold in the fes­tive sea­son, es­pe­cially in ru­ral ar­eas, fol­low­ing a good mon­soon. Karan Vasa, as­so­ci­ate vice-pres­i­dent of Rid­diSid­dhi Bul­lions Ltd, says that dur­ing the fes­tive sea­son, im­ports would be any­where be­tween 100 and 150 tonnes a month. “But prices have al­ready gone up, from around Rs 27,000 for 10 grams to Rs 32,000.”

High prices are al­ready hurt­ing fes­tive sea­son sales, with some re­tail­ers say­ing sales are 20 to 30 per cent lower than 2012. “Our sales have touched an all-time low this sea­son. Most cus­tomers were only in­ter­ested in exchanging old gold for new. That doesn’t of­fer much ben­e­fit,” says M.P. Ahamed, chair­man of Mal­abar Gold, a prom­i­nent re­tailer in Ker­ala. “Gold is like wa­ter, it flows in from ev­ery­where,” says Me­hul Choksi, CMD of Gi­tan­jali Gems, one of In­dia’s largest branded jew­ellery mak­ers, al­lud­ing to the il­le­gal gold creep­ing into In­dia.

While south­ern states ac­count for 60 per cent of In­dia’s con­sump­tion, Ker­ala con­sumes 20 per cent of the coun­try’s gold and has the high­est num­ber of jew­ellery re­tail­ers, which has now crossed 5,000. In 2011, Ker­ala ac­counted for 245 tonnes (worth around Rs 80,000 crore) of the to­tal 986 tonnes of gold sold in In­dia.

The hikes have led to cus­toms duty per kilo ris­ing from Rs 1.25 lakh to Rs 3.16 lakh. “The duty hike will kill the lo­cal gold jew­ellery in­dus­try,” says Ahamed. The cri­sis may put up to 200,000 work­ers in Ker­ala’s gold in­dus­try in jeop­ardy. “It has spawned the smug­gling mafia. Now, le­git­i­mate busi­nesses are hard put,” says B. Govin­dan, chair­man, Bhima Jewellers, and work­ing pres­i­dent of All Ker­ala Gold & Sil­ver Mer­chants’ As­so­ci­a­tion.

“Those who usu­ally buy gold dur­ing Au­gust-Septem­ber for Onam and the wed­ding sea­son had bought it dur­ing June-July, when gold prices crashed from Rs 3,000 to Rs 2,250 per gram. Now, many have post­poned their pur­chases, in the hope of another fall in prices,” he adds. Th­ese fac­tors, and re­peated hikes in cus­toms duty, along with Ker­ala’s VAT rate of 5 per cent pose se­ri­ous chal­lenges to the jew­ellery trade, says Govin­dan. N. Ananda Padmanabhan, MD, NAC Jewellers in Chen­nai, says that de­mand for gold has fallen 60 per cent this year.

TRADE IN DOL­DRUMS

Price vo­latil­ity will hurt mar­gins too. Says Puneet Datta, di­rec­tor of New Delhi-based Mul­tani Jewellers, “Gold prices are sen­si­tive to global events and mea­sures taken by RBI. Vo­latil­ity in prices kills the trade.” Ku­mar Jain, vice-chair­man of Mum­bai Jewellers’ As­so­ci­a­tion, says jewellers are de­pend­ing on gold scrap to meet the short­age. “Cus­tomers will suf­fer as prices will rise dur­ing the fes­tive sea­son,” he says. Ex­porters fear they would miss their dead­line with over­seas buy­ers in the run-up to the Christ­mas sea­son.

But the Gov­ern­ment be­lieves im­port curbs are the way to go. “If we can min­imise gold im­ports for six months or a year, it will dra­mat­i­cally change the sit­u­a­tion on CAD,” Fi­nance Min­is­ter P. Chi­dambaram said in June. But the in­dus­try says the curbs have hit those who do le­gal busi­ness. “If this sit­u­a­tion per­sists, gold trade will go back to the way it was 1980s, when smug­gling was ram­pant,” says Ahamed. That’s not good news for an in­dus­try that’s al­ready los­ing its sheen.

C SHANKAR

THE GOVERNMENTHAS HIKED IM­PORT

DUTYON JEWELLERYTO 15 PER CENT

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