India, the world's largest gold consumer, meets almost all of its demand via imports, and purchases from abroad require buyers to sell the rupee to raise greenbacks. Government efforts to curb imports is meant to limit that downward pressure on the currency but has instead driven a surge in illegal imports (smuggling) of the precious metal.
The rupee has fallen more than 10% in the past couple of months and the country has sharply increased the import tax on gold to 8% (from 1% in Dec 2011) and last month India's central bank banned the use of credit to procure gold (requiring dealers to pay in advance for imports). As the WSJ reports [4], the measures are having an effect. Gold imports declined 11% to 859.7 tons in 2012 from 969 tons in 2011 and the total for June fell about 80% to 30 tons from 162 tons.
But while supply may be falling, demand isn't - "Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences." Sure enough, "smuggling of gold seems to be increasing month on month," the number of people arrested by the department for gold smuggling rose to 32 in Q2 2013 from just 4 the year before - and officials are able to "detect only about 5% to 10% of the gold smuggling."
[5]
Via WSJ [4],
A fishing boat slid into the southern Indian coastal village of Kodikkarai late one evening in mid-June, carrying a cargo from Sri Lanka: a stack of gold bars weighing more than 40 pounds.
Four men jumped off the boat and headed for waiting Jeeps.
The men before they could sell the gold in the nearby city of Chennai, a trading hub for the precious metal.
The men were charged with smuggling in a case that reflects a sharp upswing in illegal gold imports being reported by officials in recent weeks.
The upturn follows the government's latest effort in June to rein in a drastic slide in the rupee's value by implementing policies to discourage importing of the precious metal.
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But while supply may be falling, demand isn't.
Gold is the preferred form of savings for farmers, Mr. Srivastava said. It is also the traditional gift for brides and purchased by millions of Indians during Hindu festivals, he added.
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director of the World Gold Council's India office... "Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences."
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"Smuggling of gold seems to be increasing month on month,"
"It is mostly coming from Dubai but also from Bangkok and Singapore."
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The value of the gold seized during the quarter was 270 million rupees, more than 10 times the 25 million rupees of precious metal retrieved from smugglers during the same period in 2012
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"I feel the trend [of smuggling gold] will definitely continue as prices are low," said Nimesh Shah, a Dubai-based gold dealer. "If someone wants to buy gold, they will buy it from here rather than pay tax in India."