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India Tightens Gold Supply, Leads to Increase in Gold Smuggling

July 26, 2013157 view(s)

Gold smuggling into India has increased sharply, following new tariffs imposed by the country’s government, The Wall Street Journal reported.

In June the Indian government introduced new measures to discourage Indian citizens from importing gold. Amidst heavy demand for physical gold in that country, the value of its currency, the rupee, has slid drastically.

Based on the rise of reported gold smuggling cases in the second quarter of 2013, over the same period in 2012, it is estimated that gold smuggling operations have increased tenfold in less than a year.

The tax on imported gold to India had been set at six percent until June, when it was raised to eight percent.

The country is the world’s largest consumer of gold and almost all of that demand is met via imports. In order to buy gold from outside India, its citizens exchange rupees for dollars or other foreign currencies. The curb on imports was intended to limit that pressure.

“Last month, the government also made it harder for dealers to use bank credit to buy the precious metal from suppliers overseas,” wrote Biman Mukherji and Arpan Mukherjee in the Journal. “The nation's central bank restricted banks and trading agencies from importing gold on behalf of customers and taking payment later. The move effectively required dealers to pay cash in advance for imports.”

The Central Bank changed its approach on Monday, removing the ban on deferred payment. It now requires banks and dealers that import gold to ensure that 20 percent of their gold imports are in turn re-exported.

"Overall, this measure would mean that gold availability in open markets is going to reduce still further," said Santosh Srivastava, managing director of a company that runs a chain of 135 retail jewelry shops across the country.

These tactics are having an impact on official gold imports. Gold imports declined 11 percent to 859.7 tons in 2012 from 969 tons in 2011. The decline in officially reported Indian gold imports from May to June was even steeper, falling by almost 80 percent to just 30 tons in June from 162 tons in May, according to an official with the country’s trade industry.

But despite an extreme tightening of supply, demand hasn’t fallen at all.

Gold is the preferred form of savings for farmers and is also the traditional gift for brides, according to Srivastav. He reported that it is purchased by millions of Indians during Hindu festivals.

“We have always maintained that there is a very innate demand for gold in India," said P.R. Somasunderam, managing 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."

Most officials and gold traders in India say that the decline in imports means large opportunities for smugglers.

"Smuggling of gold seems to be increasing month on month," said a senior official in the Department of Revenue Intelligence, a part of the Finance Ministry that combats tax evasion. "It is mostly coming from Dubai but also from Bangkok and Singapore."

Smuggled gold bullion and gold jewelry and other artifacts is smuggled by sea and across land borders with Bangladesh and Nepal.

In the second quarter of 2012, there were 21 cases and four arrests for gold smuggling in India. This year, there were 205 gold smuggling cases and 32 arrested during the same period.

“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, said the official,” wrote Mukherji and Mukherjee.

This represents only a small percentage of gold being smuggled into the country.

"I think we are able to detect only about five percent to 10 percent of the gold smuggling in the country," said a Revenue Intelligence official.

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