Will duty cut halt smuggling in gold?

By Ramnath Subbu

MUMBAI, MARCH 18. The import duty on gold has been lowered to Rs. 250 per 10 grams in the 2001-02 Union Budget from Rs. 400 earlier. India being largely an importer of gold, this step is expected to bring down smuggling activity in the yellow metal which had increased when in 1999, the import duty was increased from Rs. 250 per 10 gm to Rs. 400.

India consumed more than 35 per cent of global gold production. The February Bulletin of the Bombay Bullion Association says that more gold reached the market in 2000 via unofficial routes. While imports through the official route fell to 533.7 tonnes from 573.8 tonnes in 1999 unofficial imports rose to 165.5 tonnes from 107 tonnes.Apart from the impact of high import duty movements in the hawala and cash dollar rates also played an important part in explaining the surge in unofficial activity during 2000.

According to the World Gold Council, overall demand in 2000 was 855.2 tonnes, 2 per cent higher than 1999 consumption due to patchy monsoons, lack of weddings and falling rupee. In particular, gold consumption in the fourth quarter was 232.4 tonnes, 27 per cent more than the same period in 1999. The WGC also says that the robust economic growth and an increase in imports from unofficial channels kept demand trends strong.Despite massive floods in some parts of the country, the monsoon season in 2000 was in fact, the driest in 8 years. This impacted output and considering that agriculture represents 25 per cent of India's GDP and a good harvest impacts consumer spending one can appreciate that the demand for gold had also been affected.

According to analysts, import of gold is not likely to come down this year. In fact, this year, official imports could be around 600 tonnes and smuggling could come down by 30-35 per cent.'' said Mr. Dinesh Parikh, bullion analyst.

``Gold is coming in through Singapore and Nepal besides Hong Kong and Dubai. A new trend has been the smuggling of gold from Bangladesh but a significant part is re-exported there as finished ornaments, to the extent of 30 per cent,'' Mr. Parikh said.

According to Mr. Madhusudan Daga, bullion analyst, ``Smuggling will decrease and the dollar cash flow will go into banks - the official kitty. The margins are down to Rs. 100 per gold biscuit (tola) which is not worthwhile for those bringing in gold through unofficial routes.''Gold prices have reacted and since January 1, when it was at Rs. 4,550 per 10 gm, it has reached Rs. 4,250. The international price has been in the $250-270 an ounce level and is now around $260.

``Domestic price of gold has weakened due to the earthquake in Gujarat and dissolution of a couple of banks in Ahmedabad. One of them in particular, Classic Co-operative Bank was patronised by many bullion dealers.'' said an industry analyst.Internationally, dealers feel the price of gold could even inch up as the lease rates which are normally around 2 per cent are ruling around 7 per cent. ``Besides, the Bank of England's auction of 25 tonnes of gold last week was carried out at $266 an ounce. However, volumes were only 2.2 times against the expected four times,'' said an analyst.

Some sections of the industry have called for an exclusive bullion exchange China last week announced the setting up of a National Gold Exchange in Shanghai in the current year. This is aimed at lowering government control and a panel has already been set up there. Last year, China produced 173 tonnes of gold and consumed around 207 tonnes.

A proposal has been forwarded by the Bombay Bullion Exchange to the Forward Markets Commission (FMC) to set up a bullion exchange in India. Negotiations have been on for sometime now and a decision in this regard is likely in the near future.

Send this article to Friends by E-Mail

Section  : Business
Previous : Global slowdown impacts Indian tech stocks
Next     : State-of-the-art gold refinery in Maharashtra