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.
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.
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.
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.
THE GOVERNMENTHAS HIKED IMPORT
DUTYON JEWELLERYTO 15 PER CENT