Gold needs some very urgently-needed policy changes

January 15, 2020

London (Jan 15)  Successive governments in India have waffled on gold policies for long, forcing much of the gold trade to go underground.

The import duty on gold at present is 15 percent (12.5 percent + a GST of 3 percent). Anyone familiar with the gold trade knows that any duty of over 5 percent is actually an incentive for smugglers because 5 percent of the market price of gold is approximately the cost of smuggling in gold.  This includes interest costs, the grease money that has to be paid to handlers at the borders of both the source and destination countries. And then the cost of finding the right channels through which gold is allowed to find the eventual customer.

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Traders in gold will tell you that smuggling in of gold was on the decline ever since the much hated Gold Control Act was repealed by the government on 6 June 1990.  But smuggling reared its head in 2012 when an import duty of 6 percent was slapped on gold – a notch above the 5 percent rule-of-thumb mark.   Import duties were then raised to 8 per cent, then to 10 per cent and 12.5 per cent (with an additional GST of 3 percent). The result is that today gold smuggling is extremely lucrative, and is estimated at 100 tonnes a year on an average. Considering a price of Rs.10,000 per 10 grammes, this means a value of Rs.30,000 crore a year.

Smuggling does two nasty things for any economy.  First, it erodes the value of the domestic currency faster than most people imagine.  Smuggled gold is paid for in US dollars purchased on the black market (or in exchange for opium, which too has a notional dollar tag).

Second, the longer the smuggling activity continues, the stronger does the smuggling channel become. That becomes like a reliable pipeline.  Thus, if today it is used for smuggling gold, tomorrow it could be used for drugs, or even clandestine arms. Gold thus subsidises other illicit trades. And the authorities have never seized even 10 percent of the gold smuggling in Today, instead of gold coming in from the Middle East, it comes from almost all the neighbouring countries


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