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Wednesday, January 01, 2014
Curb Gold Smuggling
Jan 1, 2014: Gold prices have been retreating the world over in the last few months and the import bill of the precious metal has also been falling in India. While the Reserve Bank of India and the government have been discouraging gold imports, there is a case for a rethink on the steps taken to curb gold imports in the new scenario. The import bill has come down from about $ 55 billion in the last financial year to about $ 20 billion in the nine months of the current year. The success in curbing imports has been attributed to the high duties slapped on gold and the restrictive terms of imports. Duties have gone up from 2 per cent a year ago to 10 per cent. Importers are also required to export 20 per cent of what they import.
What is to be noted is that the quantity of gold imported during the high duty period did not show much appreciable decline. This shows that the lower import bill was more because of the fall in the price of gold than because of decreasing demand. Since the appetite for gold is steady what the higher duties and restrictions have done is to facilitate greater inflow of gold through illegal channels. Reports have indicated that smuggling has increased because the official price of gold is higher than the international prices. Even the RBI governor has made this observation recently. Low duties had made smuggling unprofitable for a long time but the trend is now reversing. It is eminently sensible to reduce the price gap so that smuggling becomes unprofitable. The negative impact of smuggling on the economy is much the same as the pressure of a high gold import bill on the current account deficit (CAD).
The CAD position at 1.2 per cent of the GDP is now much better than when it was at 5-6 per cent, which necessitated the imposition of duties to curb gold imports. Even an increase in gold imports may not have any serious impact on the CAD position. The demand of gold for investment purposes may actually see a fall in the coming months because international and domestic prices are seen to be declining in the coming months. The demand on account of sentiment and for wedding needs cannot be curbed even if high duties are imposed. That weakens the case for the distorting duties, which spur the illegal inflow of gold.