India May Relax Gold Restrictions In March

January 27th, 2014 by


Indian Finance Minister P. Chidambaram told reporters Monday that the severe restrictions put in place on gold imports would be reviewed at the end of the fiscal year, which ends March 31st. He said that any easing of the 10% import tariff or the “80/20” Rule would depend on how far the nation’s Current Account Deficit had shrunk.

This is in apparent reaction to the open letter to the Commerce Ministry by ruling Congress Party leader Sonia Gandhi, widow of slain Prime Minister Rajiv Gandhi. In the letter, she called for easing restrictions to aid the foundering jewelry sector, which has been hard hit by the policy.

The restrictions, which include a proviso that 20% of every gold import shipment must be turned into jewelry and exported before further imports are allowed, has cause shortages and driven the spot price for gold in India to over $150 more than the London price. As a result, gold smuggling in India has exploded. Seizures from the first half of the 2013-2014 fiscal year (April-October) totalled $33.6 million, double the amount for the entire previous year.

Finance Minister Chidambaram admits that an estimated 1-3 tonnes of smuggled gold a month is getting through checkpoints, but that the gold restrictions are “absolutely necessary.” Some analysts agree, stating that the damage cause by the ballooning CAD, which was 4.9% of GDP before the restrictions, is far worse than any amount of smuggling could inflict on the economy.

That said, Chidambaram said that the nation could not rely solely on bans on gold imports to heal its economy, saying that greater effort needed to be focused on expanding Indian exports. The CAD is expected to have dropped to $50 billion (USD) from $88 billion when restrictions were put into place. For the first half of fiscal 2013-2014, the CAD as a percentage of GDP had dropped to 3.1%. Gold is traditionally the second-largest import by India, next to oil. Until 2013, India had been the world’s largest importer of gold.

by Steven Cochran