Ease up on gold

Mumbai-India (June 1)  With Indian savers losing their appetite for the yellow metal, it’s time to relax gold import curbs in calibrated doses.

Finally, Indian policymakers seem to be taking baby steps towards easing the draconian curbs on gold imports put in place last year. The Reserve Bank of India (RBI) recently allowed private jewellery exporters to import gold under the 80:20 rule, a prerogative of banks. It has also permitted jewellers to buy gold on credit as against the cash-and-carry system mandated before. These concessions, though small, are welcome, as they will go towards restoring a semblance of normalcy in the Indian jewellery trade and bring down costs for domestic consumers. They seem to have been prompted by the vastly improved balance of payments situation and strong capital flows after the recent election verdict. But the time has come for greater boldness and more substantive measures to free up gold import restrictions, even if in calibrated doses.

The arguments against easing up on gold import curbs are misplaced. Fears that the gold import bill will surge back to $50-60 billion levels if restrictions are eased are exaggerated. India’s unprecedented gold demand in 2011-12 was triggered mainly by investors chasing high returns from gold, due to the global downturn, double-digit inflation and poor returns from other financial assets. The circumstances today are different, with the global economy turning, inflation cooling and financial assets making a comeback. Gold has halted its 12-year bull run and delivered losses to investors in the last one year, even as stock markets went up by 20 per cent and bonds earned 8 to 9 per cent. This has already had a telling effect on investor behaviour with savers pulling out of gold exchange traded funds and cutting bar and coin purchases by 60 to 70 per cent. Therefore, even if bullion imports are freed up, investment demand, which makes up a third of the import bill, is unlikely to surge back. Moreover, the artificial curbs on gold imports haven’t really had the intended effect on traditional jewellery buyers. Despite severe curbs on imports, Indian jewellery sales are down by just 16 per cent over the last 12 months. It is clear that a significant portion of the jewellery trade’s gold needs, valued at anywhere between $4 and $6 billion a year, are being met by smuggled gold.

Against this backdrop, doing away with the 80:20 rule and easing the other procedural restrictions on gold imports in a phased manner can have many positive spin-offs. Apart from benefiting consumers and reviving the jewellery industry — which is a large employer — it will bolster customs revenues. Of course, it is important to ensure that affluent domestic buyers don’t use bullion as a parking ground for black money. Strictly enforcing PAN card requirements on all jewellery and bullion purchases valued above say, ₹50,000, should adequately take care of this problem.