Gold exports can rescue us

The Reserve Bank issued a spate of notifications this year to curb gold imports in view of the widening current account deficit (CAD).

These came especially after the high gold imports in the months of April and May --- over 300 tonnes, or worth $14.6 billion. Alarmed by the misleading year-on-year comparison, measures that followed to arrest gold imports were understandable, given the bleak economic environment.

Amidst all the focus and worry centred on gold imports to tackle the CAD, something important has missed our consideration — allowing bullion exports.

This is not to suggest that the RBI consider options to convert idle gold stocks, including temple gold, into bullion. The central bank has already clarified that it has no such idea.

his is a case for allowing the export of locally mobilised gold (through recycling and disinvestment) worth billions of dollars that can undoubtedly come to the nation’s rescue.

India is the world’s largest consumer/importer of gold and has, therefore, always been a net buyer. It has, however, occasionally been a net seller — most notably in 1980 and recently in early 2009.

This means, on such occasions locally generated supply of gold through recycling (of old jewellery) and disinvestment (in bars and coins) exceeds overall demand, resulting in a net surplus of metal available locally.

This type of supply-demand equation drives the rupee gold rate into a discount to the imported metal.

In other words, there is a disparity in the local rate to the converted dollar price. At such times, the import of gold is unviable as there is a local surplus as well as price disparity.

Here’s how

At the same time, this offers an excellent opportunity for bullion exports only if the regulatory provisions and duty structure allow it to be commercially viable, which is presently not the case. Indians have been net sellers for the past two weeks, a rough estimate of which could easily mean a 100-odd tonnes worth $5 billion or more in immediate exports! The past week’s rupee rout coincided with the rising dollar gold price (intra-day high of $1435/oz), resulting in a rapid rise in the rupee gold price that reached an all-time high of over Rs 35,000/10 gm. From its recent two-month trough of Rs 25,000/10 gm, this represented a 40 per cent return on gold.

Known for their price sensitivity, Indian gold buyers quickly turned sellers, selling old jewellery and disinvesting from bar and coin holdings.

The resultant pool of locally generated metal supply for the time being far exceeds demand, once again creating a local surplus and pushing the local price into a substantial discount of Rs 200,000/kg or $100/oz.

Moreover, the rush to exit from gold has been so strong that it may have, in many cases, outstripped the ability of the trade to buy stocks, thereby restricting this ‘natural’ mobilisation of our idle gold stocks.

Right tweaks

A few right tweaks in the existing framework is all it will take to make bullion exports commercially viable.

Today, this is not merely an internal trade requirement, it can be a game changer for the troubled nation and help restore some economic balance.

Here, two changes are critical — providing either advance licences against such exports or duty draw-back at par with the actual duty at the time of export and exemption from the value addition norms to allow exports in bullion form.

Indeed, this would require overlooking archaic paper procedures such as requiring the old bills of entry, as these are structurally impossible to get, in view of the bigger picture. It is a given fact that every ounce of gold, other than the fractional mine production, had been duly imported at some point in the last two decades.

There is a genuine case to legitimately allow for bullion exports especially when these can keep the nation from going under. We cannot time the market and time is of the essence.

The necessary changes will need to be made swiftly, otherwise the window might be lost if this falls into a logjam like the one in operationalising the 80:20 import export ruling.

Bouts of surplus

There is a strong likelihood of the market seeing further bouts of surplus during the remainder of this fiscal year. The dollar gold price is likely to see a further upside from a possible disappointment of expectations for a September start for the QE tapering and the looming Syrian crises.

This, combined with a weak rupee, would mean much higher local gold prices, of levels having the potential to drive greater recycling and disinvestment while choking demand, resulting in a surplus.

Exports of the net surplus gold can discreetly provide comfort in keeping the twin deficit targets as promised without inviting undue attention both at home and outside.

Along with effortlessly mobilising the idle gold stocks, putting money in the hands of the people will not only steer consumption worth billions elsewhere but also provide for more tolerance towards future official gold imports.

(The author is a consultant to UK-based Metals Focus.)

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