Government eases curbs on gold imports, scraps 80:20 scheme

In a move that should cut premiums on gold, lower prices for buyers and cut smuggling, the government unexpectedly scrapped a rule imposed in August last year mandating that a fifth of all the precious metal imported should be re-exported.

The Reserve Bank of India issued a notification late on Friday withdrawing the norm imposed on August 14, 2013, to reduce the yawning current account deficit and relieve pressure on the rupee that had weakened sharply. At the time, emerging markets had come under pressure because of talk about the US Federal Reserve winding down its stimulus programme.

“It has been decided by the government of India to withdraw the 20:80 scheme and restrictions placed on import of gold,” the Reserve Bank said.

The rule, along with the high customs duty of 10% — raised in stages to that level last year — had led to a rise in smuggling, besides distorting imports.

The government said the current account deficit is no longer a concern so there is no reason to keep the curb in place.

“Why continue with the emergency measure when the current account deficit is under control?” said a government official, adding that it had become counter-productive, leading to distortions and illicit imports.

The current account deficit narrowed to 1.7% of GDP in FY14 from 4.7% of GDP in the year before and is likely to stay at this level in the current fiscal year as well.

As of October, smuggled gold worth Rs 208 crore had been seized, about double the Rs 107 crore caught in all of FY14.

The government was also concerned that the rule was encouraging importers to hoard gold, causing a distortion in trade. Friday’s decision to scrap the restriction took the bullion markets by surprise as they were anticipating a tightening of rules following a surge in gold imports in October to around 114-115 tonnes from less than 25 tonnes a year. Speculation had been rife over the past few weeks about such a move. “This will reduce premiums on gold and bring down smuggling considerably,” said Sudheesh Nambiath, senior analyst at precious metals consultancy GFMS Thomson Reuters.

However, there is expectation in some quarters that the government may impose suitably non-distorting curbs if imports remain high.”The scrapping of the scheme altogether is a correct measure taken by RBI and domestic curbs will likely be imposed. Let them do that judiciously as we are concerned about our exporters, who should get seamless supply of yellow metal,” said Pankaj Parekh, vice-chairman, Gems & Jewellery Export Promotion Council. Premiums on gold are collected by nominated agencies and other authorised importers such as star and premium trading houses that import the yellow metal on a consignment basis for supply in local markets. When supply is tight, premiums rise, and vice-versa.

Bullion dealers in Mumbai said premiums had collapsed from $8-10 an ounce to virtually zero after news of the government decision was aired on the electronic media.The price of spot gold, excluding 1% value added tax, polled by commodity exchange MCX stood atRs 26,140 per 10 gm, down Rs 157 from the previous close. The active December contract, which is nearing expiry on the bourse, fell by Rs 230 to .Rs 26,017. Futures and spot prices tend to converge around delivery time.Last year, India imported 825 tonnes of gold. In January-September period, gold imports stood at 525 tonnes

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