Mumbai: Returning home to the southern Indian state of Kerala from Dubai last month, 27-year-old welder Mohammed Ahmed Jaffer was arrested after customs agents said they discovered gold in the lining of his brass flower pot.
Jaffer allegedly was offered Rs30,000 ($491) from an importer
seeking to bring in 1 kilogram of bullion valued at about $50,000
without paying the 10% customs tax, case documents made available to Bloomberg
show. Such stories have become commonplace in India, where the
government raised duties on gold three times last year and illegal
imports almost doubled to about 200 metric tons, the World Gold Council
estimates.
Smuggling is like cancer, said T.S. Kalyanaraman, the billionaire chairman of Thrissur, India-based Kalyan Jewellers Ltd,
which sells everything from necklaces to pendants at 55 stores in India
and the United Arab Emirates. It will spoil the country’s economy. If
they continue this arrangement, it will be a heavy loss for the country.
While Prime Minister Manmohan Singh’s
increase in gold levies was intended to help fix India’s record
current-account deficit, the move is also fostering the black market for
smuggled metal to a country that was the world’s largest buyer in 2012.
Based on last year’s average price, the value of illegally imported
gold in 2013 totaled about $9 billion, or more than twice the annual
revenue of Signet Jewelers Ltd, the largest US jewelry chain.
Gifting gold
Demand remains robust in India, where gold is considered a
good omen when given as a gift for weddings and festivals, and citizens
have no social security other than gold, said Haresh Soni,
chairman of the Mumbai-based All India Gems & Jewellery Trade
Federation, which represents about 300,000 jewelers and bullion dealers.
Consumption will not go down.
Strong physical demand for gold in Asia helped spur a
rebound in prices in 2014, after a 28% plunge last year that was the
biggest drop since 1981. Gold for immediate delivery increased 12% this
year in London compared with a 1.3% advance for the Standard &
Poor’s GSCI Spot Index of 24 raw materials.
Gold smuggling has a long history in India. With a
virtual ban on official imports for domestic use until 1990, demand was
met by illegal supplies, according to Y.V. Reddy,
a former Reserve Bank of India governor. From 1968 to 1995, smuggling
mostly ranged from 10 tons to 217 tons a year, he said. Smugglers were
common villains in Bollywood films of the 1970s, with some portrayed as
gang leaders. Matinee idol Amitabh Bachchan played one such role in a 1975 hit, Deewaar, based on a real-life Mumbai gangster.
Singapore, Dubai
Gold costs about 20% more in India than in the metal’s
major regional trading hubs of Dubai or Singapore, reflecting the import
tax and a premium to secure supplies. That’s a big financial incentive
for smugglers looking to exploit demand in India, according to K.N. Raghavan, commissioner at the Customs House Cochin in Kochi.
Since restrictions were imposed last year, the biggest
bust at Cochin International Airport occurred in September. Two women
wearing burqas, the full-length body garments worn by some Muslim women,
were found to be carrying 20 kilograms of gold when they walked through
the customs area, said Raghavan. One was pregnant and the other was
carrying a child.
We used to see sporadic instances of smuggling in the
last 10 years, said Raghavan. Since August, the frequency of such
incidences jumped. Carriers used to hail from the poorer socio-economic
strata. Now we’re seeing people who are respectably employed, smuggling
in gold as margins are good.
Bear market
Prime Minister Singh, 81, targeted gold for higher duties
as part of a government attempt to tame a widening current- account
deficit, accelerating inflation and a weakening rupee. The Reserve Bank
of India estimates bullion contributed to almost 80% of a record $87.8
billion deficit in the year ended 31 March, when the nation imported 845
tons of gold.
The trigger for import restrictions occurred in April,
when gold prices plunged into a bear market, down as much as 26% from
the previous year’s high, as global investors lost faith in the metal as
a store of value and equities rallied. The cheaper metal sparked a
demand surge in India. In the two months through May, jewelry buyers and
investors imported 304 tons, or 37% of the total for all of 2013, based
on WGC data.
Finance minister P. Chidambaram
responded by boosting the import tax three times. The central bank
barred jewelers from buying gold on credit from banks and required
evidence that 20% of the purchases were being used to make items that
were exported rather than sold at home.
Retail sales
The restrictions worked. Gold shipments slumped 57% to
205 tons in the six months through December from a year earlier and
premiums paid by jewelers rose to a record $160 an ounce over the London
cash price, which traded at $1,347 today. Sales fell at retailers
including Gitanjali Gems Ltd, Titan Co. Ltd and Tribhovandas Bhimji Zaveri Ltd in the quarter ended December.
The current-account deficit, the broadest measure of
trade, tracking goods, services and investment income, shrank in the
fourth quarter to the smallest in at least four years to $4.2 billion.
The gap for fiscal 2013-2014 will be contained below $40 billion,
Chidambaram said on 7 March, less than the $70 billion targeted by the
government. The rupee rallied about 11% through Tuesday from a record
low in August.
As the government’s measures cut demand for ornaments and
bars, India was overtaken by China in 2013 as the world’s biggest gold
consumer, WGC data show.
‘Beyond expectations’
With the deficit shrinking more than anticipated and
smuggling on the increase, the government may soon ease the import
curbs, said Dharmakirti Joshi, the chief economist in Mumbai at Crisil Ltd., the Indian unit of Standard & Poor’s.
You are leaning on unofficial channels for getting gold
into the country, said Joshi. This creates the case for easing
restrictions because you have tried to correct one distortion, but
created another.
Robin Bhar, the London-based head of metals research at
Societe Generale SA, also expects policy makers may reduce the import
tax and change the rule on re-exports. Keeping limits as they are will
hurt the domestic industry, he said in an e-mail.
For now, there are no plans to ease the duties. The
government will review the curbs when this year’s current- account data
can be calculated and analyzed, Chidambaram said at a press briefing
with the central bank Governor Raghuram Rajan in New Delhi on 7 March.
As sales in India slow, smuggling is expanding. Cochin
Airport reported 79 cases from April to January and seized more than
27.4 kilograms of gold, according to customs data. That’s up from 18
cases and 2.39 kilograms in the previous year.
Bizarre methods
Air travelers are resorting to innovative ways to conceal
gold to escape detection, said Raghavan, the customs commissioner.
Smugglers have tried to sneak in gold in the form of trolley wheels or
beading on handbags, or stashed in mobile phones and body cavities,
according to customs.
All of them are very bizarre, he said.
About 24 kilograms of bars were found by cleaners in the toilet of an aircraft in Kolkata about two months ago, said Gaurav Sinha,
additional customs commissioner. Most of those arrested for smuggling
are carriers who have no stake in the consignment, he said by telephone
on 12 March.
Deterrent undermined
While the punishment for convicted smugglers is three to
seven years in prison, the deterrent is undermined by lax bail rules and
drawn-out trials, said Ravi Hirani,
a lawyer with the Mumbai high court. Offenders can get bail from courts
for a surety of as little as Rs50,000, and trials can be delayed by a
year or two, he said.
The government should make gold smuggling a non-bailable
offence, if it is serious about stopping the practice, said Hirani.
Currently, an offender can pay a bail and get away without being taken
into police custody. If you smuggle in drugs, the sentence is 10 years
to life imprisonment.
Jaffer, the welder arrested in Cochin, was released after
his family posted bail, mostly because the value of the gold was less
than Rs1 crore, customs records show. His case may be delayed for months
because of the court’s crowded agenda, according to customs.
PRAVEEN SHARMA
PGDM IST
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