India’s love affair with gold continues unabated. Legal gold imports are around 750 tonnes per year. According to the RBI Semi-Annual Foreign Exchange Management Report, the RBI held 743.84 metric tons of gold at the end of September 2021. In terms of value, the share of gold in total foreign exchange reserves reaches a peak of nearly 5.88%.
Our foreign exchange reserves at the end of November 2021 stood at $ 640.4 billion, the fourth largest in the world. According to a 2018 report by Niti Aayog, “Transforming India’s Gold Sector,” around 23,000-24,000 tons gold is unused with households and religious institutions across the country.
Yet smuggling continues – by land and air, hidden in body openings, in vehicles, in machine parts, in molten metal. The ingenuity of the smugglers is matched only by the vigilance of the customs officer. The Rajya Sabha was informed on December 21, 2021 that 7,288 kg of gold had been seized in the last three years from 2019-20 to November 2021.. And seizures are admittedly a small part of what has been smuggled.
Demand accompanied by supply restrictions imposed by tariff barriers fuels smuggling. We initially restricted all imports of gold. We have liberalized. Import was allowed at a specific rate of Rs300 per 10g – this translated to around 1 percent and significantly reduced smuggling. Today we have a base tariff rate of 7.5%.
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Several other policy measures have been put in place. In November 2015, three programs were launched: the Gold Monetization Program (GMS), the Sovereign Gold Bond Program and the India Gold Coin. Stratagems that the Prime Minister in his inimitable style called “sone pe suhaagaa (icing on the cake)”.
The hope is that the citizens will bring out the dormant gold to take advantage of these schemes. It was believed that the import of gold would decrease – implicit in this was the belief that smuggling would also decrease.
There was also the punching system. The Bureau of Indian Standards (BIS) act has been amended to allow the sale of gold jewelry by hallmark – unique identification numbers guaranteeing purity are provided to each piece of jewelry.
At the start of 2021, GMS was redesigned (R-GMS). It is estimated that around 22-24 tonnes of gold have so far passed under GMS – a very small percentage of the 23-24,000 tonnes of gold that would be in the economy. There are currently only around 950 punching centers in the country. We are currently in Series VII / VIII / IX and X of the RBI Gold Sovereign Bond program.
Smuggling continues, however. It has a detrimental multiplier effect on the economy. It generates black money, generates hawala transactions; its proceeds finance other criminal activities. The result is a loss of legitimate jobs.
It is evident that the current base rate of tariffs provides benefits that outweigh the risks. As a politician, we have never accepted the fact that gold is an integral part of the life of an average Indian. We have always believed that imports should be controlled for fear of a drain on currencies.
Given our reservations, it is time to question ourselves. We could lower the basic tariff on imported gold – lower it enough that the risk of contraband is not worth it. And juxtapose the income generated by duties on imported gold with the enormous damage that smuggling causes.
With the Union budget fast approaching, now is the perfect time to review the whole gold policy. Basic tariffs must be reduced enough to make smuggling unattractive. Policymakers could also consider reducing the rate to the current 3% GST rate. This would lead to a decrease in customs revenue and an increase in imports initially – and would have a negative impact on the current account deficit. But with the increase in exports, it is a fallout that we can live with.
There should be a strong system for tracing legal imports of gold along the value chain. This is essential to ensure that gold remains in the legal economy.
The R-GMS needs to be reviewed. The 2.5 percent interest the plan is currently offering is low. It should be increased. Just as I am against an amnesty program that actually rewards tax evaders, R-GMS should act as an amnesty program. No questions should be asked about the source of the gold. Provision should be made in the R-GMS to return the gold object in its original form if the depositor so wishes. This is especially true of ornaments that are family heirlooms.
Another policy action required is also to examine Dore gold – the semi-pure gold alloy which is allowed to be imported at a lower tariff currently at 6.9 percent. Obviously, the dutyy on these imports Dore should also be reduced accordingly. There are serious concerns that the Dore gold which cMainly from Africa can potentially be linked to conflict, human rights violations and other abuses. The London Bullion Market Association (LBMA) has set up a Responsible Gold Guidance (RGG). This describes the responsible sourcing requirements. We should adopt these standards.
Dubai is the main source of gold – both lawfully imported and smuggled. We must not lose sight of this fact even as we negotiate an FTA withe WATER.
For a government that invests so much in publicizing its plans, gold plans have received little publicity. It should be approached imaginatively.
– Najib Shah is the former chairman of the Central Council of Indirect Taxes and Customs. Opinions expressed are personal
First publication: STI