Nov 28, 2014

Gold import control goes

I had blogged about the matter of controlling gold imports into India initially here, and then here when RBI relaxed the controls to include star export houses. Now the RBI has cleared out all such controls through this notification, and gold is free to be imported, after payment of required customs duty which is around 10 percent. 

Recap:

1. Alarmed by rising current account deficit and rising gold imports during early and mid 2013, RBI, in consultation with the Govt., used provisions of FEMA to bring out a circular to curb gold imports during August 2013. Some supplementary circulars were later on issued to clarify the matter, effectively making it clear that no one, including banks, could import gold for domestic sale. The language of the circular effectively led to a ban on import of gold. 
2. This resulted in significant decrease in import of gold into the country. However, the gold imported for export purposes was out of purview and such gold was still being imported, to be exported later on. 
3. There was an artificial price distortion in Indian domestic gold market due to this. Smugglers invented ingenious ways to bring gold into the country. The policy of wait and watch continued till elections got over.
4. RBI brought out a circular, in late May 2014,  partially relaxing the gold imports to include star and premier exporters (with more than 2500 crore turnover over last three years) leading to a surge of imports by such big exporters. This partial relaxation lead to windfall chance for such established big exporters, as they alone were allowed to import gold into domestic market while all others were not allowed to do so. This was as good as allowing a quota to these few exporters, while shutting out all others. At the time of issue of this partial relaxation, there were hardly four or five such entities in the country who could qualify to gain from this arrangement. 
5. Today, RBI got out of all such controls on gold by issuing the latest notification. 

This would not have been a blog post, but for the timing of this announcement. 
RBI is getting out of such controls at a time when the gold import has surged significantly. In fact, during the month of October 2014, the gold imports surged by more than 250% over last year, and there were some concerns about this rise in gold import. In fact, a senior in RBI was quoted just last week saying that RBI is thinking of bringing in more controls to curb gold imports. That's why this move is significant. 

However, I believe that somewhere, sane forces prevailed over control masters when it came to making this decision. I reason thus:

  • First, there is no need to feel concerned about y-o-y increase this year as there is base effect in play. Last year this time, we had tight gold controls in place. Any relaxation shows up as a spike naturally. 
  • Second, gold imports are price inelastic in India. 
  • Third, such full and partial controls helps none but smugglers and a closed group of big exporters. The price distortion in market due to such controls leads to additional incentive to such elements. 
  • Fourth, we are in a relatively comfortably position when it comes to current account deficit and rupee stability. 
  • Fifth, it was a policy nightmare to understand and practically implement schemes such as 20:80 that these circulars mandated. It lead to inefficiency, corruption and crony capitalism, and not to mention overtime work for customs and DRI which went after smugglers, with mixed results at success. 

In light of above, I laud RBI, and the Govt that it probably consulted.