The hike in import duty on gold has led to a spurt in smuggling of gold into the country from neighboring states like Bangladesh, Myanmar and Sri Lanka.
The latest provisional data showing a massive shrinkage in the current account deficit (CAD) for July through September has only raised more eyebrows among the sleuths monitoring the activity with limited resources.
Directorate of Revenue Intelligence (DRI) top officials estimate the smuggling at 500kg a day with less than 1% of the illegal consignment getting booked by law enforcers. Thus implying a monthly Rs4,500 crore of illegal imports at current market prices or Rs54,000 crore annually.
Contrast this with finance minister P Chidambaram’s target of 20-25 tonne imports per month, almost 15 tonne of the demand shortfall is being met by smuggled gold.
The buck doesn’t stop at smuggling, “How does one fund the transaction if not through the illegal hawala (cash) route?” asked a senior economist.
“Payments are also being made through under-invoicing of exports or over-invoicing of imports for smuggled gold,” he added.
Official estimates available with dna, put the Jan-Oct 31, 2014 number of gold seizures at 579 and valued at Rs153.20 crore and 871 confiscated goods worth Rs99.08 crore in fiscal 2013.
The twin causes for smuggling are the hike in import duty of gold, in the last 18 months, from zero to 10% that reduced legal inflows of the yellow metal and the consumer demand that remains inelastic.
India, in calendar year (CY) 2010 and before duty hike, imported gold worth $38.47 billion and for CY 2011 it was $53.92 billion. Surprisingly, imports dipped marginally to $52.77 in CY 2012 after the government cess starting from 2% and gradually increased to the current level of 10%.
For 2013, Jan-Sep, the figure eased to $36.08 billion, a major reason for the easing CAD.
With the levy, the government has re-introduced controls that were done away with in 1993 by the then prime minister Narasimha Rao and the current prime minister Manmohan Singh, then finance minister, to rid the economy of smuggling and money laundering.
The present finance minister, P. Chidambaram’s target to bring CAD to $56 billion may quite be achievable under the present circumstances if backdoor operations of gold imports are ignored.
“Chidambram’s intention is to bring down gold imports officially and pump in the surplus cash, estimated by him to be $40 billion, in productive sectors,” said a senior official from the intelligence unit of the government. “Theoretically, the approach is right but practically, he is breaking the backbone of the economy and creating jobs for smugglers,” said the official.
CAD — the overshot traded value of goods and services imported over those exported — for the aforesaid period fell a whopping $16.6 billion or Rs1,03,036 crore, at average dollar-rupee rate of Rs62, to $5.2 billion, against the previous quarter’s (April-June) $21.8 billion.
This was largely due to a massive drop in gold imports to the tune of $12.5 billion or Rs77,587 crore from the previous quarter or $7.2 billion (Rs44,690 crore) year-on-year due to high import levies.
Over 85% of gold imports were in jewellery, unlike China where over 50% are for industrial use, like IT chips, integrated circuits and transistors, to name a few.
“We have brought this to the notice of Chidambaram,” said a government official.
“The demand for gold is always on the rise; every Indian invests in gold and even the poorest of the poor would gift gold as part of the tradition, be it the arrival of a new baby in the house, wedding or a success in job or education. What is our FM trying to do if not bring back the Licence Raj,” quipped a senior banker.
It was obvious that if Indians want their gold, the Indians will have their gold. You can’t break thousands of years of tradition and culture because of the ignorant whims of a few bureaucrats. Reuters published an article detailing the extent to which Indian smugglers will go in order to bring the money of kings into the country. This includes hiding it in underwear, swallowing it whole and even painting gold staples gray. What is most disturbing is the lengths authorities are willing to go to in order to stop a supposedly free people from buying a brick of metal.
Indian gold smugglers are adopting the methods of drug couriers to sidestep a government crackdown on imports of the precious metal, stashing gold in imported vehicles and even using mules who swallow nuggets to try to get them past airport security.
Stung by rules imposed this year to cut a high trade deficit and a record duty on imports, dealers and individual customers are fanning out across Asia to buy gold and sneak it back into the country.
Sri Lanka, Thailand and Singapore are the latest hotspots as authorities crack down on travelers from Dubai, the traditional source of smuggled gold.
In a sign of the times, whistleblowers who help bust illegal gold shipments can get a bigger reward in India than those who help catch cocaine and heroin smugglers.
“Gold and narcotics operate as two different syndicates but gold smuggling has become more profitable and fashionable,” said Kiran Kumar Karlapu, an official at Mumbai’s Air Intelligence Unit.
“There has been a several-fold increase in gold smuggling this year after restrictions from the government, which has left narcotics behind.”
From travellers laden head-to-toe in jewellery to passengers who conceal carbon-wrapped gold pieces in their bodies – in the mistaken belief that metal detectors will not be set off – Indians are smuggling in more bullion than ever, government officials say, driven by the country’s insatiable demand for the metal.
That suggests official data showing a sharp fall in gold buying, which has helped narrow India’s current account gap, may significantly underestimate the real level of gold flows.
The World Gold Council estimates that 150 to 200 tonnes of smuggled gold will enter India in 2013, on top of the 900 tonnes of official demand.
Between April to September alone, India’s customs officials seized nearly double the amount of smuggled gold it nabbed in all of 2012.
“Though the quantum of seizures has increased, in our opinion it reflects only 1 to 2 percent of total smuggling,” said a revenue intelligence officer in Mumbai who declined to be named. “Dubai is still the number one place from where gold gets in and Singapore is slowly emerging. Sri Lanka has become a staging point.”
Grappling with a high trade deficit and weak currency, India imposed measures this year to crimp demand for gold, the second most expensive item on its import bill after oil. It imposed a 10-percent duty on bullion and a 15-percent tariff on jewellery. Imports plunged to 24 tonnes in October from a record 162 tonnes in May.
Gold is an integral part of Indian culture, offered at weddings and festivals. India was the world’s biggest gold consumer until last year but will be overtaken by China in 2013.
India has now stepped up cooperation with nearby countries to stem the smuggling.
Last week, Sri Lanka limited the amount of jewellery its residents can take out of the country and it will try to monitor whether they bring it back. Pakistan banned all gold imports in August for a month as it believed much was being smuggled on into India.
Indian gold premiums have soared to $130 an ounce over London prices due to the supply crunch, compared with about $2 an ounce in Hong Kong, Singapore and Thailand.
Banks and other official trading agencies in Singapore and Thailand that had supplied gold to their Indian counterparts have stopped due to India’s new rules.
But smaller dealers and retailers say they have been selling more to Indian customers than ever before, in jewellery and other forms.
Brian Lan, managing director of Singapore-based dealer GoldSilver Central Pte Ltd, said he has sold about 10 kg (22 lbs) of gold to a single Indian customer and gets multiple similarly big orders on some days.
“We have Indian dealers buying from us directly on a regular basis,” said a second Singapore dealer. “They say they have their own means of taking it in without getting caught.”
GOLDEN STAPLES, SLEEPLESS NIGHTS
As customs officials at airports and borders get more vigilant, smugglers are innovating.
In June, a passenger flying from Dubai was caught at New Delhi airport with about 755 grams (1.7 lbs) of solid gold staples painted grey. Officials stopped the man because the cardboard boxes he was carrying were stapled far more than seemed necessary.
In several other cases, travelers have been caught with gold in their underwear. Flight attendants and police officers have been arrested for aiding the smugglers.
“We are trying to plug all the loopholes. We have strengthened our anti-smuggling staff and installed door metal detectors,” said S.A.S. Navaz, deputy commissioner of customs in the south Indian city of Kochi. “We are spending sleepless nights.
“Most of the time, it is done with the support of (airport) staff. It is very difficult to keep an eye on everyone.”
In late November, 56 Sri Lankans were held in Kochi after they were found with nearly 12 kg of gold. Some of them had travelled to Kochi six times last month.
Sri Lanka, which raised taxes on gold imports from June to November due to rising smuggling to India, last week said female residents could only fly out with 120 grams of jewellery, the equivalent of about 28 wedding bands. Men are allowed a third of that.
Customs officials may allow exceptions but will monitor if passengers bring back the same amount of gold they left with.
“In the last three to four months, we have seen several cases of gold smuggling from Sri Lanka to India through cities such as Mumbai, Kochi and Chennai,” Leslie Gamini, a spokesman for Sri Lankan customs, said from Colombo.
“It is a very difficult task. But we have to implement it. We are in the process of developing guidelines on how to implement this.”
Though the number of arrests made in India has increased, those that get caught are usually only the “carriers” who transport gold for as little as 10,000 rupees. The people behind the smuggling are rarely identified.
In an effort to change that, Mumbai customs offers a reward of up to 50,000 rupees per kg of bullion seized for informers in gold smuggling cases. Cocaine and heroin informers get only up to 40,000 rupees and 20,000 rupees respectively.
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