The Reserve Bank of India (RBI) has released the final report of the working group on issues related to gold imports and gold loans. The key recommendations aim to moderate the demand for gold imports, considering its impact on the country’s current account deficit (CAD). A combination of demand reduction and supply management measures, and others to increase the monetisation of idle stocks are needed, says the report.
It recommends that import duties on gold imports be reviewed from time to time, to dissuade inflows as warranted by the evolving balance of payments situation. While a sharp increase in import duties is counter-productive, a well modulated increase in import duty could reduce demand. When the CAD eases to a sustainable level, a review of the raised duties could be undertaken. The restrictions on the carrying of gold and gold jewellery by incoming Indians from abroad can also be reviewed to ensure that bringing gold into the country is a less attractive option, says the report.
The group urges limits on imports by canalising agencies and banks, purely as an emergency measure, to reduce the demand for gold. When the CAD as a per cent of GDP comes down to a sustainable level, these restrictions may be relaxed. The share of gold re-exported with value addition from the country as a proportion to gold imported is declining steadily. In this context, such of those entities importing bulk gold through banking and non-banking channels can be asked to have an export obligation, based on a certain percentage of imports of gold, says the group.
Import of gold is permitted on a consignment basis, on an unfixed price basis and on a metal loan basis. This preferential treatment makes gold imports free from both price and currency risks for consignors, as it effectively amounts to their short-selling in India and simultaneously covering their short position abroad, with both risks borne by end-buyers of jewellery and gold exchange-traded funds. This is not the case with other items, as coal, edible oil, etc. Therefore, aligning gold import regulations with the other imports will take away significant incentives to import gold and go a long way towards reducing gold imports by creating a level field between gold and other imports, says the report.
Differential pricing of banking services and finance for gold imports, such as the stipulation of high cash margin on opening of letters of credit for import of gold, imposition of surcharge on interest on gold metal loans to domestic jewellery manufacturers and explicitly prohibiting banks from extending advances for purchase of gold bullion/primary gold/jewellery/coins/ingots/gold ETF/gold MF units, with the exception of providing working capital finance to jewellers for productive purposes are some of the other recommendations.
Strangely, the report does not refer to an overvalued rupee making imports cheaper. It is worth recalling that at the height of the foreign exchange crisis in 1991, Manmohan Singh liberalised imports, cut import duties and devalued the rupee to launch the reforms process. The present thinking in RBI seems to run counter to that strategy, preferring a strong rupee, higher duties and import restrictions.