Mumbai: The efforts of Indian policymakers to curb gold imports and ease the stress on the country’s balance of payments could deal a blow to domestic jewellers, in the event of a sudden drop in supply, experts said. It could also lead to a surge in gold smuggling, they said.
India’s jewellery market has started feeling the heat of gold shortages. The trade is painting a doomsday scenario—the closure of shops and the loss of jobs.
On 22 July, the Reserve Bank of India (RBI) lifted a ban it imposed in May on consignment-based gold imports for domestic use, but linked all forms of gold imports to mandatory exports. The new norms stipulate that imported gold can be used for domestic use only if 20% is compulsorily exported. Importers will be permitted to undertake fresh imports only after 75% of the metal stock is exported, RBI said.
Traditionally, India doesn’t have a large export market for gold. That apart, the economic slowdown has weakened demand for gold in global markets. India exported 7% (61 tonnes) of the total imported gold (867 tonnes) in fiscal year 2013. The ratio of exports to imports has remained at that level in the last few years, according to estimates of the All India Gems and Jewellery Federation.
This would effectively mean that if the same quantity of gold was to be imported, exports should rise to 173 tonnes. To be sure, that will not be the case as imports are coming down. Gold imports in June are estimated to have fallen to around 31 tonnes after the RBI regulations, down from 162 tonnes in May and 141 tonnes in April, according to a 16 July PTI report.
In value terms, gold and silver imports are estimated to have declined substantially to $2.45 billion in June from $8.39 billion in May, the report said
“How is it possible to double exports overnight?” said Haresh Soni, chairman, All India Gems and Jewellery Federation. “What is at stake is the survival of many small jewellers and millions of workers employed by them.”
The curbs could encourage the movement of gold through illegal avenues, said an expert.
“Most of the gold importers in India have not tested the export market so far,” said T. Gnanasekar, director of Mumbai-based commodity and forex research firm Commtrendz Research and Fund Management. “There is a possibility that such curbs will encourage people to get gold through alternative channels.”
In order to avoid such a situation, jewellers should be allowed to set up their own offshore units or branches and export jewellery to meet the RBI norms, said Gnanasekar.
But industry officials said this won’t be feasible as a majority of retail jewellers are not engaged in exports. There were 300,000 jewellery outlets as of 31 March and about 10 million workers in the industry, according to All India Gems and Jewellery Federation. Only about 6,000 jewellers are engaged in exports.
“Not all jewellers can export gold except a few large firms,” said P.D. Jose, general manager at Joyalukkas group, one of the large jewellery chains in the country.
Smuggling on the rise
A surge in smuggling could result from the sudden drop in availability.
Illegal imports of gold have been on the rise in recent years as the RBI and government been tightening regulations on gold imports. The government has raised the import duty on gold in phases from 2% to 8%.
In the first 10 months of 2012-13, the Directorate of Revenue Intelligence seized gold worth Rs.60.17 crore (200kg at the current price of gold) and uncovered 36 instances of smuggling. In the corresponding period in 2011-12, it seized gold worth Rs.7.42 crore and traced 15 cases.
Last year, 102 tonnes of gold made its way into India through unofficial routes, said a 13 July report in the Business Standard citing Thomson Reuters GFMS, which compiles data for the World Gold Council. The flow could rise to 140 tonnes this year, an increase of 40%, the report said.
“Smuggling of gold is already happening and it is likely to shoot up further,” said Si Kannan, a bullion expert based in Mumbai. “The larger issue is that the cost of this measure on the industry is very high as many small jewellers will find it difficult to meet export requirements. Sudden drop in the availability of gold will also push up the domestic prices,” Kannan said.
After a decade-long bull run, gold prices collapsed internationally in mid-April after the European Commission said European Union member Cyprus may have to sell gold worth about €400 million. Cyprus later said it would not sell gold.
In the last week of June, gold plunged to a 34-month low of $1,200.65 per ounce as US Fed chairman Ben Bernanke said it may wind down its asset-purchase programme if the economy continued to improve. Since then, international gold prices have risen 10.38%, while in the domestic market, they have risen 12.72% to Rs.28,389 from Rs.25,186.
On Thursday, international gold prices traded at $1,325.21 per ounce, down 0.01%, from its previous close of $1,325.25 per ounce. In the domestic market and MCX, gold traded at Rs.28,389, down 0.74% from the previous close of Rs.28,600 per 10g.
“The measures are not good as far as the players are concerned, but this is a national necessity, as India needs to bring down the current account deficit. But this will impact demand for gold at households as prices will go up,” said Madan Sabnavis, chief economist at Care Ratings Ltd.
The current account deficit was 4.8% of GDP in 2013.
RBI steps in
Early this year, an RBI panel had recommended that the apex bank should consider introducing gold accumulation plans, gold-linked accounts, modified gold deposits and gold pension products, among other measures. The intention was to discourage people from investing in physical gold and give them the benefit of investing in gold from alternative financial instruments.
RBI took the first big step to curb direct gold imports in May. It restricted banks to imports on a consignment basis only to meet the needs of exporters of gold jewellery, thus limiting the supply of the metal through this channel for domestic use. The central bank also restricted loans against gold coins to those weighing up to 50g per customer.
Later, the regulator removed the ban on gold importers and “rationalised” the norms by linking it to exports.
First Published: Thu, Aug 01 2013. 06 18 PM IST
SOURCE : http://www.livemint.com/Money/