India Dispatch: As the festival and wedding season nears, demand for the precious metal is set to surge. Anxious to protect a weak rupee, the government has taken steps to curb imports, leading to a thriving illegal trade.
Gold smuggling rises in India
Smuggling gold into India is on the rise because of the steep increases in import duty charges.
India is the world's biggest consumer of the metal, with demand typically surging during the festival and wedding season, which runs over the next few months.
The government this month announced the third rise this year alone in the import duty on gold, raising it to 10 per cent from 8 per cent. Such steps have been taken to try to reduce the volume of bullion coming into the country. Gold imports play a major role in India's gaping current account deficit and have contributed to the depreciation of the rupee, which last week crashed to record lows against the US dollar.
"Gold is coming into India through illegal means because there is a duty which is very large and it's attractive for smugglers to do that," said Nilesh Parekh, the chairman of Shree Ganesh Jewellery House.
Other official steps have also added to the appeal of smuggling gold into the country. Many traders stopped importing the metal after the Reserve Bank of India (RBI) last month announced a new rule stating the importers would have to re-export at least 20 per cent of the gold brought in, resulting in much confusion.
"Because of this there's a lot of illegal gold coming into India - the demand is very high and the premiums are also high," said Mr Parekh.
Gold prices have surged this month because of the weak rupee.
The RBI has clarified the rule recently and legal imports are expected to soar again in a matter of days.
Despite the effort that India has put into curbing gold imports, national demand for the metal reached 310 tonnes in the second quarter, up 71 per cent on the same time last year, according to the World Gold Council. Bar and coin investment surged 116 per cent, while jewellery demand was up 51 per cent. The organisation expects India's gold demand to reach up to 1,000 tonnes this year.
"Demand for gold is innate in India," says Somasundaram PR, the India managing director for the World Gold Council. "Addressing India's demand by curbing supply is likely to boost unauthorised channels leading to potentially undesirable consequences."
With gold playing an important role in Indian culture, this appetite is unlikely to subside.
"We believe the latent demand for gold in India is very robust," says Somasundaram PR. "It is not a supply-driven demand. People buy gold as a long-term investment to protect their wealth and gold also has huge significance socially, emotionally and economically in India. So, if demand continues to remain strong, as we expect, and formal imports continue their slow down, then this is likely to lead to increased flows of gold supply coming through unauthorised channels into India."
ICICI Securities has also questioned the consequences of trying to reduce gold imports.
"Though measures aimed at gold look the easiest to implement, the efficacy of such measures will always remain in question," analysts at ICICI wrote in a recent report. "Further curbs on gold imports could lead to alternate channels developing, apart from causing severe stress to the jewellery firms and consequently unemployment."
Much of the illegal flows are coming from the Arabian Gulf, authorities say.
"All the couriers arrested [in Goa] so far were bringing in gold from Sharjah, Doha and Dubai," VPC Rao, the commissioner of central excise and customs in Goa, told the Times of India.
"From our interrogations, we found that most of the couriers were domestic passengers engaged to deliver the gold transferred to them by international passengers on board the aircraft. A few of them had agreed to smuggle gold in return for free air tickets to visit their families back in India. Others were seasoned couriers, probably doing the job for a small commission."
In response, authorities are stepping up efforts to catch the smugglers.
"We expect more such incidents, and will deploy additional staff at the airport," Mr Rao said. "We will also take measures against smuggling by sea, by stepping up patrolling of coastal roads and inducting six shore guard formations by September."
Many jewellers in India have stopped selling gold coins and bars over the counter as they try to appease the government and avert the introduction of potentially more drastic steps to curb gold imports.
"The Indian government feels that investment in gold at this moment is not right for the country," said Mr Parekh.
"Gold investment doesn't fetch us any employment or it doesn't move the economy. It doesn't help us to create jobs. Most Indians take the gold and keep it in lockers. It's kind of a stagnant investment. The government may come out with many more such precautionary steps if the rupee keeps on getting depreciated."
During the festive season, he said, the amount of gold that Indians would get for their money would be reduced because of higher prices.
"The volume will be less but the spending will be the same," said Mr Parekh. "People don't go out and erratically buy gold. During the festive season they have a certain budget to spend on gold."