Flooded By Gold Smuggling, India's New Cabinet Prepares To Lift Gold Capital Controls

When one thinks India, the generic thing that comes to mind is the outcome of the recent historic election which saw the worst performance ever of the once unbeatable Gandhi family and the ascent of what many hope is a more pro-business regime (because as America itself has shown, hope and change sell). However, what perhaps should come to mind is something different: namely pent up demand for gold.

Recall that India is a country which, in order to keep its current account deficit at bay, instituted the most draconian gold capital control measures in history to prevent its population from taking refuge from scorching inflation and parking its fiat in gold. An incomplete summary of the measures taken in 2013 by India is summarized below.

  • Jan 21 - The government raises the gold import duty by 2% to 6%.
  • Jan 22 - The government more than doubles the duty on raw gold to 5%.
  • Jan 30 - Finance Minister P. Chidambaram says there are no plans for additional taxes or curbs on gold imports.
  • Feb 1 - The Reserve Bank of India (RBI) plans to introduce three or four gold-linked products in the next few months.
  • Feb 6 - The RBI says it would consider imposing value and quantity restrictions on gold imports by banks.
  • Feb 14 - The central bank relaxes rules on gold deposit schemes offered by banks by allowing lenders to offer the products with shorter maturities.
  • Feb 20 - The Trade Ministry recommends suspending cheaper gold jewellery imports from Thailand.
  • Feb 28 - India keeps its gold import duty unchanged in its annual national budget, defying industry expectations.
  • Feb 28 - India proposes a transaction tax of 0.01% on nonagricultural futures contracts, including for precious metals.
  • March 1 - The Finance Minister appeals to people not to buy so much gold.
  • March 18 - The Reserve Bank of India says it is examining banks that sell gold coins and wealth management products to identify "systemic issues", with a view to closing any legal loopholes.
  • April 2 - The Finance Ministry suggests it is unlikely to raise the import tax on gold further to avoid smuggling and would instead introduce inflation-indexed instruments.
  • May 3 - The RBI restricts the import of gold on a consignment basis by banks.
  • June 3 - The Finance Minister says India cannot afford high levels of gold imports and may review its import policy.
  • June 5 - India hikes the gold import duty by a third, to 8%.
  • June 21 - Reliance Capital halts gold sales and investments in its gold-backed funds.
  • June 24 - India's biggest jewellers' association asks members to stop selling gold bars and coins, about 35% of their business.
  • July 10 - India's jewellers announce they might continue a voluntary ban on sales of gold coins and bars for six months.
  • July 22 - The RBI moves to tighten gold imports again, making them dependent on export volumes, but offers relief to domestic sellers by lifting restrictions on credit deals.
  • July 31 - India hopes to contain gold imports well below the 845 tonnes that were shipped last year, the Finance Minister says.
  • Aug 13 - India hikes the import duty on gold for a third time in 2013, to 10%. Duties for silver and platinum are also increased to 10%. The customs duty on gold ore bars, ore, and concentrate are increased to 8% from 6%.
  • Aug 14 - India turns the screws on gold buying again, banning imports of coins and medallions and making domestic buyers pay cash.
  • Aug 29 -  India considers plan to allow commercial banks to buy gold direct from ordinary citizens
  • Sept 19 - India hikes import duty on gold jewerly to 15%

For better or worse, this attempt to crush popular demand for gold merely resulted in soaring and increasingly more ingenious attempts to smuggle gold into the country, which however do not register in the official data, and as such, the government no longer has an accurate perspective of what true capital flows look like.

However, the current regime of gold demand suppression may be ending soon, and all the demand for gold, pent up over the past year and likely amounting to billions of dollars, may soon bubble right back to the surface. Reuters reports that the Reserve Bank of India and finance ministry officials will recommend that the new government relax strict gold import rules to head off a surge in illegal buying, officials with direct knowledge of the plan said.

Because who could have possibly predicted that prohibiting legal means of obtaining gold would simply result in a surge in illegal ones?

The story, yet another one of a failed central-planning bank believing it could determine what India's vast population wanted to purchase is largely known:

Last year, India imposed restrictions on gold imports, the second biggest import after oil, following a steep rise in the country's current account deficit.


However, the curbs spurred smuggling into India, the world's biggest buyer, through illegal "hawala" channels, which are informal international networks for remitting money.


"We don't want to suppress demand artificially as it is creating hawala money. The longer you wait, the more will be such parallel channels," one of the officials said.


The incoming prime minister, Narendra Modi, who led the Bharatiya Janata Party (BJP) to a decisive victory in a just-concluded election, has indicated his willingness to remove the gold curbs. Modi will be sworn in on Monday and the plan to ease the curbs is ready for his government to take up.


"The next finance minister can sign the file on gold imports whenever he wants to sign it," one of the officials said.


The curbs would be removed in phases, the officials said. The RBI did not have immediate comment.


"Let the new finance minister take charge. Only then such issues can come up for a decision," said D.S. Malik, spokesman at the Ministry of Finance.

To be sure, the central bank can point to the current account numbers and claim success:

The current account deficit hit a record high of 4.8 percent of gross domestic product, or nearly $88 billion, in the fiscal year that ended in March 2013, pushing the rupee to a record low of 68.85 to the dollar in August.


The crackdown on gold imports helped trim the current account deficit to 0.9 percent of GDP in the December 2013 quarter, compared with a record 6.5 percent a year earlier, while the rupee has strengthened to 58.81.

What, however is not disclosed is how many billions in rupee were used to purchase gold illegally, which according to estimates was roughly 200 tons in 2013 (in addition to the legal imports of 825 tons in the same year), and thus left the country via unofficial pathways. It is this that should be most concerning to the RBI, as the central bank no longer has an accurate indication of what capital outflows it really is facing, having created with its actions an entire underground gold smuggling industry.

And sure enough, earlier the Reserve bank of India made the following announcement:

The Government of India and Reserve Bank of India has been receiving representations from the jewelers, bullion dealers, AD banks, and trade bodies to rationalise the guidelines for import of gold. Taking into account such representations and in consultation with the Government of India, it has been decided to modify the guidelines for import of Gold by the nominated banks / agencies / entities. These revised guidelines which will come into force with immediate effect are as under:


Star Trading Houses / Premier Trading Houses (STH/PTH) which are registered as nominated agencies by the Director General of Foreign Trade (DGFT) may now import gold under 20:80 scheme subject to the following conditions:

  1. The STH/PTH should have imported gold prior to the introduction of 20:80 scheme. STH / PTH should get the required verification done by the Department of Customs at any port where they have imported gold consignment in the past.
  2. The first lot of gold under this scheme would be based on the highest monthly import during any of the last 24 months prior to the RBI’s notification dated August 14, 2013, subject to a maximum of 2000 Kgs.
  3. As in the case of other nominated agencies, the eligible quantity may be imported by STH / PTHs from any port, subject to their eligibility limit / maximum quantity allowed to them.
  4. For proper compliance, before import, they must submit the import plan, port-wise and quantity-wise, to the concerned Customs office, where the verification of the figures of past performance was done. This information will be sent to all the other ports from which imports are permitted. The overall discipline of exporting 20% of each imported consignment before the next consignment is imported will be equally applicable to such STH/PTH importers.

Further, it has been decided to permit the nominated banks, to give Gold Metal Loans (GML) to domestic jewellery manufacturers  out of the eligible domestic import quota of 80% to the extent of GML outstanding in their books as on March 31, 2013.

So will India finally allow its population to once again purchase gold without limitations as it appears set on doing? And how will the price of gold react when the formerly largest buyer of gold is back on the bid and scramble to make up for one year of lost activity? We should know shortly, but one thing is certain: in the absence of private sector manipulation now that even the Gold Fixing cartel is imploding, the central bank manipulators, especially those at the BIS will have to work overtime in selling paper gold to compensate for what may well be a tsunami of pent up physical purchases out of the country with the 1.2 billion population.