Jan 18, 1999
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GOLD Yellow Peril The import duty on gold goes up, raising fears of renewed smuggling. By Shefali Rekhi
It was a move waiting to happen. Last week, the Ministry of Finance increased the customs duty on gold from Rs 250 per 10 grams to Rs 400 even as imports of the precious metal seemed set to cross the 400-tonne mark this month. At a time when the Government is severely strapped for funds and faces an ever-widening trade deficit, the step came not a moment too soon. "The decision is justified. You cannot allow foreign exchange outflow for gold imports at such a time," declares Central Economic Intelligence Bureau (CEIB) Chairman D.S. Solanki. Between April and October 1998, the trade deficit touched $5.8 billion (Rs 24,360 crore), against $2.7 billion during the same period the previous year. Exports have been abysmal this year, registering a negative growth of 5.1 per cent between April and October; imports, on the other hand, zipped along at 9.4 per cent. The Indians' passion for gold played quite a role in forming those figures. After capital goods, export-related goods, petroleum and crude, gold imports account for the maximum outflow of foreign exchange from India; the CEIB estimates that gold worth $7 billion will be imported in 1998-99. In fact, while oil imports till end-October last year cost the Government $3.5 billion, gold imports matched that figure barely a month later. The decision to hike the import tariff on gold, then, makes sense -- although consumers and the World Gold Council (WGC) wouldn't agree. After the Government's announcement, gold prices across the country shot up by Rs 120-150 per 10 grams. WGC Regional Chief Executive Rolf Schneebeli, too, has been unequivocal in denouncing the move. "The decision was misdirected. The government stands to lose out on sales tax and profit tax if the gold business once again goes underground," he says. That's a concern even analysts share, which is why they're being circumspect in giving their approval to the decision. Most agree that such a hike will work only as an interim measure. Raja Chelliah, chairman of the National Institute of Public Finance and Policy, agrees: "Such a move is a double-edged sword. One will have to watch carefully what happens on the smuggling front." He has reason to worry. Legalising gold imports in 1992 sounded the death knell for gold smuggling. In 1989, for instance, the Directorate-General of Revenue Intelligence (DGRI) seized a record eight tonnes; the DGRI's gold haul in 1998: a meagre 0.5 tonne. After 1992, say experts, over 80 per cent of the country's demand for gold was being met through legal imports. But now, with the customs duty going up, the grey market in the yellow metal may see a revival. Says S.S. Tarapore, former deputy chairman of the Reserve Bank of India and author of the report on capital account convertibility: "This is a major setback to the issue of reforms on the gold front. The demand for gold is not going to come down. Now it is quite possible that the demand will be met through unofficial channels." If that does happen, the Government's revenue collections are likely to be badly hit. Following the 1992 directive to liberalise gold imports, customs duty inflows shot up from Rs 290 crore in 1992-93 to Rs 1,398 crore in 1997-98; and by November 1998, the Government was already richer by Rs 889 crore, thanks to higher imports of gold. Not that the Government seems worried about the possibility of renewed smuggling. Officials at the Ministry of Finance say that even after the tariff hike, the difference between the selling price of gold in London and local rates is just about Rs 400 -- not enough incentive for illegal trade in the metal. Famous last words? |
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