Returning home to the southern Indian state of Kerala from Dubai last month, 27-year-old welder Mohammed Ahmed Jaffer was arrested after customs agents said they discovered gold in the lining of his brass flower pot.
Jaffer allegedly was offered 30,000 rupees ($491) from an importer seeking to bring in 1 kilogram of bullion valued at about $50,000 without paying the 10 percent customs tax, case documents made available to Bloomberg show. Such stories have become commonplace in India, where the government raised duties on gold three times last year and illegal imports almost doubled to about 200 metric tons, the World Gold Council estimates.
“Smuggling is like cancer,” said T.S. Kalyanaraman, the billionaire chairman of Thrissur, India-based Kalyan Jewellers Ltd., which sells everything from necklaces to pendants at 55 stores in India and the United Arab Emirates. “It will spoil the country’s economy. If they continue this arrangement, it will be a heavy loss for the country.”
While Prime Minister Manmohan Singh’s increase in gold levies was intended to help fix India’s record current-account deficit, the move is also fostering the black market for smuggled metal to a country that was the world’s largest buyer in 2012. Based on last year’s average price, the value of illegally imported gold in 2013 totaled about $9 billion, or more than twice the annual revenue of Signet Jewelers Ltd., the largest U.S. jewelry chain.
Demand remains robust in India, where gold is considered a good omen when given as a gift for weddings and festivals, and citizens have “no social security other than gold,” said Haresh Soni, chairman of the Mumbai-based All India Gems & Jewellery Trade Federation, which represents about 300,000 jewelers and bullion dealers. “Consumption will not go down.”
Strong physical demand for gold in Asia helped spur a rebound in prices in 2014, after a 28 percent plunge last year that was the biggest drop since 1981. Gold for immediate delivery increased 11 percent this year in London compared with a 1.5 percent advance for the Standard & Poor’s GSCI Spot Index (SPGSCI) of 24 raw materials.
Gold smuggling has a long history in India. With a virtual ban on official imports for domestic use until 1990, demand was met by illegal supplies, according to Y.V. Reddy, a former Reserve Bank of India governor. From 1968 to 1995, smuggling mostly ranged from 10 tons to 217 tons a year, he said. Smugglers were common villains in Bollywood films of the 1970s, with some portrayed as gang leaders. Matinee idol Amitabh Bachchan played one such role in a 1975 hit, Deewaar, based on a real-life Mumbai gangster.
Gold costs about 20 percent more in India than in the metal’s major regional trading hubs of Dubai or Singapore, reflecting the import tax and a premium to secure supplies. That’s a big financial incentive for smugglers looking to exploit demand in India, according to K.N. Raghavan, commissioner at the Customs House Cochin in Kochi.
Since restrictions were imposed last year, the biggest bust at Cochin International Airport occurred in September. Two women wearing burqas, the full-length body garments worn by some Muslim women, were found to be carrying 20 kilograms of gold when they walked through the customs area, said Raghavan. One was pregnant and the other was carrying a child.
“We used to see sporadic instances of smuggling in the last 10 years,” said Raghavan. “Since August, the frequency of such incidences jumped. Carriers used to hail from the poorer socio-economic strata. Now we’re seeing people who are respectably employed, smuggling in gold as margins are good.”
Prime Minister Singh, 81, targeted gold for higher duties as part of a government attempt to tame a widening current-account deficit, accelerating inflation and a weakening rupee. The Reserve Bank of India estimates bullion contributed to almost 80 percent of a record $87.8 billion deficit in the year ended March 31, when the nation imported 845 tons of gold.
The trigger for import restrictions occurred in April, when gold prices plunged into a bear market, down as much as 26 percent from the previous year’s high, as global investors lost faith in the metal as a store of value and equities rallied. The cheaper metal sparked a demand surge in India. In the two months through May, jewelry buyers and investors imported 304 tons, or 37 percent of the total for all of 2013, based on WGC data.
Finance Minister Palaniappan Chidambaram responded by boosting the import tax three times. The central bank barred jewelers from buying gold on credit from banks and required evidence that 20 percent of the purchases were being used to make items that were exported rather than sold at home.
The restrictions worked. Gold shipments slumped 57 percent to 205 tons in the six months through December from a year earlier and premiums paid by jewelers rose to a record $160 an ounce over the London cash price, which traded at $1,347 today. Sales fell at retailers including Gitanjali Gems Ltd. (GITG), Titan Co. Ltd. and Tribhovandas Bhimji Zaveri Ltd. (TBZL) in the quarter ended December.
The current-account deficit, the broadest measure of trade, tracking goods, services and investment income, shrank in the fourth quarter to the smallest in at least four years to $4.2 billion. The gap for fiscal 2013-2014 will be contained below $40 billion, Chidambaram said on March 7, less than the $70 billion targeted by the government. The rupee rallied about 11 percent through yesterday from a record low in August.
As the government’s measures cut demand for ornaments and bars, India was overtaken by China in 2013 as the world’s biggest gold consumer, WGC data show.
With the deficit shrinking more than anticipated and smuggling on the increase, the government may soon ease the import curbs, said Dharmakirti Joshi, the chief economist in Mumbai at Crisil Ltd., the Indian unit of Standard & Poor’s.
“You are leaning on unofficial channels for getting gold into the country,” said Joshi. “This creates the case for easing restrictions because you have tried to correct one distortion, but created another.”
Robin Bhar, the London-based head of metals research at Societe Generale SA, also expects policy makers may reduce the import tax and change the rule on re-exports. Keeping limits as they are will hurt the domestic industry, he said in an e-mail.
For now, there are no plans to ease the duties. The government will review the curbs when this year’s current-account data can be calculated and analyzed, Chidambaram said at a press briefing with the central bank Governor Raghuram Rajan in New Delhi on March 7.
As sales in India slow, smuggling is expanding. Cochin Airport reported 79 cases from April to January and seized more than 27.4 kilograms of gold, according to customs data. That’s up from 18 cases and 2.39 kilograms in the previous year.
Air travelers are resorting to innovative ways to conceal gold to escape detection, said Raghavan, the customs commissioner. Smugglers have tried to sneak in gold in the form of trolley wheels or beading on handbags, or stashed in mobile phones and body cavities, according to customs.
“All of them are very bizarre,” he said.
About 24 kilograms of bars were found by cleaners in the toilet of an aircraft in Kolkata about two months ago, said Gaurav Sinha, additional customs commissioner. Most of those arrested for smuggling are carriers who have no stake in the consignment, he said by telephone on March 12.
While the punishment for convicted smugglers is three to seven years in prison, the deterrent is undermined by lax bail rules and drawn-out trials, said Ravi Hirani, a lawyer with the Mumbai High Court. Offenders can get bail from courts for a surety of as little as 50,000 rupees, and trials can be delayed by a year or two, he said.
“The government should make gold smuggling a non-bailable offence,” if it is serious about stopping the practice, said Hirani. “Currently, an offender can pay a bail and get away without being taken into police custody. If you smuggle in drugs, the sentence is 10 years to life imprisonment.”
Jaffer, the welder arrested in Cochin, was released after his family posted bail, mostly because the value of the gold was less than 10 million rupees, customs records show. His case may be delayed for months because of the court’s crowded agenda, according to customs.
“We have been seeing different modus operandi for getting gold in the country,” said Raghavan. “As long as the restrictions stay in place, we can expect smuggling to continue.”
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