Indian govt. freaks out at gold demand and will try to suppress imports again

Section:

Government to Re-Impose Gold Import Curbs to Check Trade Deficit

By Deepshikha Sikarwar
The Times of India, Mumbai
Monday, October 20, 2014

http://economictimes.indiatimes.com/markets/commodities/government-to-re...

NEW DELHI -- Barely months after gold import rules were eased, the government is looking to re-impose curbs as the country's insatiable appetite has led to a surge in the yellow metal coming into India, threatening to undermine the improvement in external balances.

The finance ministry's revenue department has flagged the issue and asked the Department of Economic Affairs and the Reserve Bank of India to review the May 21 relaxation in the import rules issued by the latter.

... Dispatch continues below ...



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The so-called 80-20 rule was relaxed in May by the RBI at the behest of the finance ministry after jewellers, bullion dealers, authorised dealer banks, and trade bodies sought easier rules. Under the 80-20 scheme, nominated agencies were allowed to import gold on the condition that 20 percent of the import would be exported. The easing of rules meant more entities were allowed to import gold.

The trade deficit worsened to an 18-month high of $14 billion in September following a 450 percent rise in gold imports as importers rushed to take advantage of lower prices. "Gold imports have risen since the norms were relaxed. ... There is a concern," a finance ministry official said. "We have written to the DEA and the RBI."

In its May 21 review the central bank allowed star and premier export houses to import the yellow metal subject to some restrictions. It also allowed banks and nominated agencies to provide gold metal loans for domestic use to jewellers and bullion traders. These rules were eased to facilitate gem and jewellery exports that had declined following the import curbs on gold.

Alarm bells have also been sounded by intelligence agencies and customs offices that see imported gold meant for export purposes getting diverted to the domestic market. Gold imports rose to $3.8 billion in September from $2 billion in August. The government wants to tread with caution and take pre-emptive measures rather than be forced to react later. With capital flows expected to remain volatile over fears of the US ending its bond purchases and starting monetary tightening sometime in 2015, 2015, the government wants to keep a leash on unproductive imports.

Experts agreed with the move. "Given the country's dependence on imported commodities and fluctuation in the currency, government will take all steps to address any factor that seeks to threaten macroeconomic stability of the country," said DK Pant, chief economist for India Ratings. "Currency has also seen movement because of rising gold imports."

India had in August 2013 imposed quantitative restrictions on gold imports because of its burgeoning current account deficit, which stood at $88 billion or 4.7 percent of GDP in 2012-13, increasing its vulnerability to capital outflows and weakening the rupee. The country also increased import duty on the yellow metal in phases. In January 2012 the government imposed an import duty equal to 2 percent of value of the commodity as against the earlier specific rate of R300 per 10 grams. It subsequently raised this in phases to 10 percent.

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