India’s love affair with gold continues unabated. Licit imports of gold are in the range of about 750 tonnes annually. As per the RBI’s half-yearly report on foreign exchange management, the RBI has 743.84 metric tonnes of gold as of end September 2021. In value terms the share of gold in the total foreign exchange reserves is at a high of nearly 5.88%
Our foreign exchange reserves at the end of November 2021 were at $640.4 billion, the fourth largest in the world. As per a 2018 Niti Aayog report, ’Transforming India’s Gold Sector’, an estimated 23,000-24,000 tonnes of gold is lying unused with households and religious institutions throughout the nation.
Yet smuggling continues -- through land and air, concealed in body orifices, in vehicles, in machine parts, as molten metal. The smugglers' ingenuity being matched only by the customs officer’s alertness. The Rajya Sabha on December 21, 2021, was informed that 7,288 kg of gold had been seized in the last three years from 2019-20 to November 2021. And seizures admittedly represent a small portion of what has been smuggled.
Demand accompanied by supply restrictions imposed by tariff barriers fuels smuggling. We initially restricted all import of gold. We liberalised. Import was permitted at a specific rate of Rs 300 per 10 gm -- this translated to about 1 percent and dramatically reduced smuggling. We today have a 7.5 percent basic custom’s duty rate.
Several other policy measures have been put in place. November 2015 witnessed the launch of three schemes -- the Gold Monetisation Scheme, (GMS), the Sovereign Gold Bond scheme and the India Gold Coin. Schemes which the Prime Minister in his inimitable style described as ‘sone pe suhaagaa (icing on the cake)'.
The hope being that citizens would bring out the gold lying dormant to take advantage of these schemes. It was believed that import of gold would come down -- implicit in this was the belief that smuggling also will come down.
There was also the Hallmarking scheme. The Bureau of Indian Standards (BIS) Act was amended to provide for hallmarking sale of gold jewellery-- whereby unique identification numbers guaranteeing purity are provided to each piece of jewellery.
In early 2021, GMS was revamped (R-GMS). It is estimated that about 22-24 tonnes of gold have so far come under GMS -- a very small percentage of the 23-24,000 tonnes of gold said to be in the economy. There are currently only about 950 hallmarking centres in the country. We are currently in the series VII/VIII/IX and X of the RBI’s sovereign gold bond scheme.
Smuggling however continues. It has a multiplier bad impact on the economy. It generates black money, spawns hawala transactions; its proceeds finance other criminal activities. It results in loss of legitimate jobs.
It is obvious that the present basic customs duty rate provides profits which outweigh the risks. As a policy we have never accepted the fact that gold is an integral cultural part of the lives of an average Indian. We always believed that import needs to be checked for fear of a drain on foreign exchange.
Given our reserves, it is time to take a relook. We could reduce the basic customs duty of imported gold-reduce it enough to make the risks of smuggling not worthwhile. And juxtapose the revenue which duty from imported gold generates with the enormous damage which smuggling results in.
With the Union Budget around the corner, this is an ideal time to examine the entire policy on gold. Basic customs duty needs to be reduced enough to make smuggling unattractive. Policy makers could also consider bringing down the rate to the current prevailing GST rate of 3 percent. It would result in decrease in customs revenue and increase in imports initially -- and have an adverse impact on the current account deficit. But with exports going up, this is a fallout we can live with.
There should be a robust system of tracing licit imports of gold all along the value chain. This is essential to ensure that that gold stays in the licit economy.
The R-GMS needs to be relooked at. The interest of 2.5 percent which the scheme presently offers is low. This should be increased. Much as I am against an amnesty scheme which in effect rewards the evader of tax, R-GMS should act as an amnesty scheme. No questions should be asked about the source of the gold. A provision should be made in the R-GMS to give back the gold article in its original form if the depositor so desires. This is especially true in respect of ornaments which are family heirlooms.
Another policy measure required is also to look at gold Dore --cthe semi-pure alloy of gold which is permitted to be imported at a lesser duty currently at 6.9 percent. Obviously, the duty on such Dore imports also needs to be correspondingly reduced. There are serious concerns that such gold Dore which comes primarily from Africa can potentially be linked to conflict, human rights violations and other abuses. London Bullion Market Association (LBMA) has put in place a Responsible Gold Guidance (RGG). This outlines the responsible sourcing requirements. We should adopt these standards.
Dubai is the major source of gold -- both licitly imported and smuggled. We should not lose sight of this fact even as we are negotiating an FTA with UAE.
For a government which invests so much in publicising its schemes, the schemes regarding gold have had little publicity. This should be addressed imaginatively.
