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India's Budget "Must Ease" Gold Import Rules to Stem Smuggling

Gold smuggling fills gap between growing demand, collapse in legal imports...
GOLD SMUGGLING into India has risen so sharply over the past year that the new BJP government's budget this week must ease restrictions on legal imports, says a leading industry figure, to reduce the size of the black market.
Haresh Soni, Chairman of the All India Gems & Jewellery Trade Federation (GJF), calls for the budget to cut gold import duty – now at 10% for more than a year – to just 2%, because the tariff has created a "big parallel economy" of smuggled gold.
BJP leader Narendra Modi, elected as prime minister in May, campaigned on a platform of ending corruption. In January he specifically blamed the previous Congress administration's anti-gold import rules – imposed last summer to reduce the country's huge trade deficit – for "smuggling reappearing.
"In the 1960s and 70s, when gold smuggling was big," Modi said, "it created the underworld, which troubles us even now."
Looking ahead to Thursday's first budget from new finance minister Arun Jaitley, "There are many ways in which the rules could be altered," says Swiss bank and bullion dealer UBS.
"One possibility is a tweak in the import tax which currently sits at 10%; another is a tweak on the 80/20 rule".
The 80/20 rule means importers must re-export one-fifth of a gold bullion shipment before taking delivery of their next. Confusion over the rule led to a collapse in Indian gold imports last summer. The GJF's Soni last week urged the government to "abolish the 80:20 rule for gold imports," as it is the "biggest impediment" to the country's jewellery industry – an industry Modi was seen backing against the Congress government in late 2013.
However, "there is also the possibility of the government doing/announcing nothing," say UBS's analysts, highlighting the government's preoccupation with India's current account balance.
"More expensive oil [and] ongoing geopolitical risks" could present greater concerns for the BJP government to address, says UBS.
The BJP's election manifesto was silent on gold imports.
For the year 2013, gold smuggling into India probably totaled "in excess of 150 tonnes," according to consultancy Thomson Reuters GFMS, attributing that growth to the higher premiums paid by Indian buyers over and above world gold prices. In turn, that domestic premium has been led by India's 10% import duty.
Will Rhind of market-development organization the World Gold Council puts the likely total higher, estimating that "something in the realm of 200 to 250 tonnes" was smuggled into India last year.
World Gold Council research at end-2013 suggested that 75% of Indian households would either continue or increase their current gold buying in 2014. But with legal gold imports dropping by nearly two-thirds since the introduction of the curbs according to official data from the Indian Ministry of Commerce, that only means "unofficial gold will undoubtedly continue to supplement official inflows," says the Council
Indian households' gold jewellery demand rose to 613 tonnes last year, says specialist website Mineweb, greater by 11% from 2012.

Luc Tustain is working as a research assistant at BullionVault, the No.1 gold and silver ownership service for private investors.

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