Gold control raj, a dull idea

TEJINDER NARANG | Updated on March 09, 2018

Gold is not an undesirable instrument of investment.

Both tariffs and canalisation of exports through PSUs are undesirable options.

The Government has been going all-out against the import of gold into the country. Given an opportunity, the Finance Ministry would like to ban import of all precious metals into Dubai as well, because most of the illegal inflows get channelised from Dubai via Pakistan, Bangladesh, and Nepal. Now a $38-billion market (our annual import bill) could turn grey, black or just about anything else.

Rising customs duties —10 per cent on precious metal and even 15 per cent duty on jewellery import, with 20 per cent export obligations -- testify to the nervousness of the policymakers on the CAD and fiscal fronts. Additionally, 100 per cent margin is mandated for letters of credit.

The policy framework is full of procedural complexities which amount to a ban on official imports. Operations through shadow market are therefore a deemed compulsion.

The Finance Ministry may be right at this critical juncture to have acted as it did, but to declare that gold is an undesirable instrument of investment is going too far.

The fundamentals of economics validate the view that a scarce commodity (gold) will always carry much more value than an abundant one (printed money).

Calling gold an unproductive asset is akin to questioning the common sense of millions of Indians, and investors the world over who believe in gold as one of the safest options of savings with reasonable returns. Meanwhile, alternatives discussed to replace gold by equivalent inflation-linked bonds have not seen the light of day.

Strange govt position

There are double standards at work. It seems fine for the government to deal in gold and even add to the CAD. This has been its record.

The RBI has gold holdings of 550 tonnes that were accumulated when it had current account surplus. The Finance Ministry then did not question the central bank’s wisdom.

Was the RBI investment unproductive? All countries have been maintaining and liquidating gold reserves. Returns on gold holdings have been three to five over those from local currencies or dollars.

For the last 22 years, the Government has proactively facilitated duty-free import through PSUs and various public and private sector banks/dealers. Government agencies, as canalising intermediaries earlier, facilitated availability of large tonnage of precious metals within India. Sellers abroad were assured of risk-free exposure by dealing with a Government entity, while the risk of local trade was mitigated.

Their practices proved to be good for trade, but negative for the CAD. The RBI was right in discontinuing this arrangement.

Today, the Finance Ministry seems to believe that after all these tariff and other controls, imports will continue to be high at about 750 tonnes.

With 15 per cent custom duty and 20 per cent export obligation, such inflows after July 2013 are likely to be negligible and revenue generation cannot be anticipated. But on paper, 15 per cent duty on $38 billion, $5.7 billion or Rs 40,000 crore, can be reflected as the amount earned by the Government. Will book adjustments for fiscal deficit now be done by presumptive entries? Auditors and rating agencies cannot be fooled!


Early this month, in a more than 40-clause document, the Customs department laid out details for authorised importers. Considering that gold is an asset of its own class, administered controls will be cumbersome and counter-productive.

The trade flow can be harmonised by following the market mechanism.

Private trade may be allowed to open letter of credits on LBMA (London Bullion Metal Association) approved members, associates, sellers for bullion import.

Banks can be asked to issue Bank Realisation Certificate (BRC) in two parts — one for exchange control and others for custom controls.

Custom formalities, bonds/bank guarantees, special audits on delayed or deferred payments, ensuring advance exports, can be dispensed with. A parallel and grey market will then be minimal.

(The author is a grains trade analyst)

Published on September 26, 2013

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