Gold Refiner Predicts Curbs by India May Be Permanent

Controls on gold imports by India will probably be permanent as the world’s largest consumer after China seeks to sustain a reduction in the current account deficit, according to the country’s biggest refiner.

The government may keep a rule that requires importers to supply 20 percent of their cargo to jewelers for re-export or introduce a system of quotas or licenses, said Rajesh Khosla, managing director at MMTC-PAMP India Pvt. The industry has to recognize there will be a “quantitative restriction” whatever policy is in place, he said in an interview in New Delhi.

India represented 25 percent of global demand last year and overseas purchases fell 43 percent in the first half of 2014 because of the curbs, World Gold Council data showed Aug. 14. Finance Minister Arun Jaitley kept the limits in his budget in July as he sought to narrow the deficit and support the rupee. Prime Minister Narendra Modi is seeking to boost growth from near the lowest in a decade and may have other priorities.

“The government has more important issues like infrastructure, manufacturing and agriculture to address,” said Himanshu Gupta, a precious metals analyst with Religare Commodities Ltd. in Noida, near New Delhi. “In the second or third year, the government may address issues like gold, but not in the immediate future,” he said by phone on Aug. 19.

Gold for immediate delivery advanced 6.5 percent in 2014 on increasing tensions in Ukraine and the Middle East and traded at $1,279.72 an ounce today. Futures on the Multi Commodity Exchange of India declined 1.6 percent this year to 27,968 rupees per 10 grams.

Increased Smuggling

The curbs helped cut the deficit to a five-year low of $32.4 billion in the year ended March 31 from a record $87.8 billion, the central bank estimates. The rupee rallied about 13 percent from a record low in August last year. That may prompt the government to reduce the import duty from 10 percent, while maintaining the re-export rule, said Bachhraj Bamalwa, a director with the All India Gems & Jewellery Trade Federation.

Unofficial imports almost doubled to 200 tons in 2013 as official flows fell 4 percent to 825 tons, the London-based council estimates. India buys almost all its gold from overseas and the country increased the import tax three times last year.

The controls will stay as the government may want to keep dollars for imports of oil and machinery for infrastructure than for non-productive gold, Khosla said on Aug. 19.

Economic Priority

“Continuation of the quantitative restriction is going to be a permanent feature,” said Khosla, who in April correctly predicted that the new government would persist with the controls. “Gold is the least priority for the government because it is not seen as a productive asset.”

Official imports by India fell to 351 tons in the first half from 620 tons a year earlier, WGC said in a report on Aug. 14. Demand in the second quarter fell 39 percent to 204.1 tons.

Overseas purchases may total 750 tons in the financial year that began on April 1 as traders boost shipments to meet festival demand starting next month, said Rajan Venkatesh, managing director for bullion at ScotiaMocatta India, a unit Bank of Nova Scotia. Imports were 670.4 tons in 2013-2014, the Commerce Ministry estimates.

The restrictions will cause a shortfall of about 300 tons in supplies this year which may be met through smuggling, Khosla said. The country could meet the gap with aggressive promotion of a gold monetization plan to tap citizens’ holdings, estimated by the WGC at about 25,000 tons, he said.

Gold Mobilization

“If the gold monetization policy fails, the gap will continue to be filled by smuggling, as is happening now,” Khosla said. “The need is to make the gold deposit scheme user-friendly. This is the only long-term solution and will give you the ability one day to turn around and say India has stopped importing gold.”

A mobilization plan by banks has not been effective as owners need to deposit a minimum of 500 grams, Khosla said. The plan should be modified to allow owners to place as little as 20 grams, he said. A national network of purity verification centers would help increase use of the plan, he said.

MMTC-PAMP’s plant located 35 kilometers (22 miles) from New Delhi airport has increased capacity to 150 tons of gold annually. The refinery, owned 72 percent by Switzerland’s MKS Holdings and 28 percent by MMTC Ltd., will probably produce 80 tons of gold in the year ending March 31 from about 40 tons a year earlier, Khosla said.

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