Steps Taken To Curb Gold Imports Finally Bear Fruit - Nirmal Bang

The market believes that high customs duty levied on gold imports by the government has brought back smugglers into the lucrative gold smuggling business. Ever since the customs duty on the yellow metal was raised to 10.0% on 13 August, 2013 and the Reserve Bank of India (RBI) linked imports of gold by jewellery exporters to their exports on 22 July, 2013, there have been fears of gold trade surging in the grey market. While we do not deny that there is smuggling of gold into India, the trade deficit and inward remittance data indicates that the quantum of gold smuggled into the country is not very significant. If the quantum of smuggled gold was large, then the trade deficit should have widened (following export under-invoicing or import over-invoicing) or there should have been a steep decline in remittances to India – neither of which has been the case so far. This implies that the measures taken by the government and the RBI to curb gold imports had the desired effect and thereby prevented the current account deficit or CAD from widening significantly in 2QFY14.

The fall in gold demand in India since August 2013 clearly shows the impact of the restrictions imposed by the RBI and the government in mid-July 2013 and August 2013 respectively. There is a view that under-invoicing of exports and over-invoicing of imports makes it possible for gold to be smuggled into India without much hassle. Our contrarian argument to this belief is that as the trade deficit has not widened and remittances (on YoY basis) have not declined the notion of a large quantum of gold being smuggled into the country does not hold much water. Imports have been trending downwards and on an average fell 12.4% YoY in August-November 2013, while exports on an average grew 10.9% YoY in the same period. This strengthens our argument that gold brought in via illegal channels could very well be in a small proportion. Also, non-crude oil and non-gold imports shrunk in August-November 2013; declining on an average by 7.5% YoY in the same period.

Inward remittances up: Inward remittances grew 1.1% YoY at US$16.1bn in 2QFY14 compared to US$16.0bn in 2QFY13 (See Exhibit 2). This indicates that the quantum of gold smuggled into the country is minimal or else there would have been a decline in inward remittances during 2QFY14 (quantitative restrictions on gold were imposed during this quarter). There is a view that non-resident Indians (NRIs), instead of remitting money to India, bought gold overseas and smuggled it into the country. One of the bigger sources of financing gold smuggling is the informal financing route - like hawala. If that was going on heavily, then there should have been a significant fall in remittances, which has not happened yet. However, there was a YoY growth of 1.1% in inward remittances in 2QFY14, after a decline in the past three quarters. While we do not deny that gold is smuggled into the country, we are of the view that the quantum of smuggled gold is not significant and thereby it has no major impact on India's balance of payments situation.

Source : Equity Bulls

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