The third increase in import taxes on gold this year by India, the world’s biggest user, is set to boost smuggling ahead of the festival and wedding seasons as official imports halt on central bank curbs, a trade group said.
Gold premiums in India have jumped to a record after banks and traders suspended imports since the Reserve Bank of India made it mandatory on July 22 for shippers to set aside 20 percent of shipments for re-export as jewelry and the increase in tariff to 10 percent from 8 percent will further crimp supplies, said Haresh Soni, New Delhi-based chairman of the All India Gems & Jewellery Trade Federation.
“Smuggling of gold will increase and the organized industry will be in disarray,” said Soni, whose federation represents about 300,000 jewelers and bullion dealers. “Goods will be kept unofficially and the situation will be uncontrollable. Jewelry prices will rise.”
India increased taxes on imports of gold, silver and platinum yesterday to tackle a record current-account deficit that’s weakened the rupee to an all-time low. Overseas purchases surged 87 percent to 383 metric tons in the four months through July from a year earlier after a slump in bullion prices spurred demand for jewelry, bars and coins. Increased smuggling may undermine government’s efforts to curb demand and hurt sales at retailers including Bangalore-based Titan Industries Ltd.
“Though measures aimed at gold look the easiest to implement, the efficacy of such measures will always remain in question,” ICICI Securities Ltd. said in a research report. “Further curbs on gold imports could lead to alternate channels developing, apart from causing severe stress to the jewelry firms and consequently unemployment.”
The tariffs on gold and platinum imports were increased to 10 percent from as low as 4 percent at the start of the year, while the levy on silver was boosted to 10 percent from 6 percent, the Ministry of Finance said yesterday. Taxes on shipments of gold concentrates, ores and dore bars will rise to 8 percent from 6 percent, while the duty on silver dore bars will climb to 7 percent from 3 percent, it said.
Finance Minister Palaniappan Chidambaram plans to curtail imports to 850 tons this year to reduce the current-account deficit and boost capital inflows by allowing state-run financial companies to issue “quasi-sovereign” bonds to finance infrastructure investments. The deficit, mainly fueled by crude oil and bullion imports, is the biggest risk to the $1.9 trillion economy, according to the central bank. The rupee fell to a record low of 61.8050 per dollar Aug. 6.
Imports by banks and other traders designated to ship gold may not be more than 150 tons in the six months through December from about 478 tons a year earlier, according to Bachhraj Bamalwa, a director at the jewelry federation.
“Government’s intention is to ensure that gold imports are reduced,” said Rajesh Mehta, chairman of Rajesh Exports Ltd. “Once the festival season starts there could be a shortage in the market. With this duty increase more imports from the legitimate channels will get into the illegitimate channel.”
Gold is bought in India during festivals, for marriages as part of the bridal trousseau and gifted in the form of jewelry by relatives. The festival season in India runs from August to October followed by the wedding season from November to December and from late March through early May.
Poor Indian laborers working in the Middle East are acting as couriers for organized gangs in return for a ticket home and a few thousand rupees, according to Rishi Yadav, assistant commissioner at the Mumbai customs department’s Air Intelligence Unit. The gangs seek to benefit by selling that smuggled bullion to traders and mom-and-pop jewelry stores, who benefit from cheaper supplies.
At Mumbai airport, customs agents confiscated gold worth 93 million rupees from April to June, almost as much they nabbed in the whole of the last year, according to Yadav.
Spot gold rose 0.2 percent to $1,324.36 an ounce at 5:38 p.m. in Mumbai today. The metal rebounded 12 percent since reaching a 34-month low of $1,180.50 on June 28. Gold for delivery in October advanced 0.1 percent to 28,910 rupees ($471) per 10 grams on the Multi Commodity Exchange of India Ltd.
Consumption in India, which imports almost all the bullion it needs, accounted for 20 percent of global demand in 2012, according to data from the gold council. Bullion imports were 845 tons in the 12 months ended March 31, while silver shipments totaled 1,963 tons, according to the Ministry of Finance. The government also increased the excise duty on refined gold to 9 percent from 7 percent, and that of silver to 8 percent from 4 percent, the ministry said.
“We cannot preach religion to men with hungry stomachs,” Bhargav Vaidya, a director at B.N. Vaidya & Associates, a Mumbai-based company which advises gold traders. “There are no supplies in the official channel just now. Smuggling will be on the rise and I hope we are not going back to the Gold Control Act days,” he said referring to a law that barred bullion imports, exports and manufacture and sale of jewelry above 14 carats for about three decades from 1968.