Could Rajan have prevented PNB scam by acting on IBJA's warning on 80:20 Gold scheme?

Last Updated: Fri, Mar 09, 2018 14:57 hrs
RBI Governor Rajan watches before delivering a lecture at the India Habitat Centre in New Delhi

Could Rajan who forecast American crisis prevent the PNB scam by acting on IBJA's warning on 80:20 Gold scheme? 

A letter from the Indian Bullion Jewellers Association dated 26th July 2014 warning the Reserve Bank is being circulated in the media. Various outlets have suggested that the IBJA warned the RBI of anomalies with the 80:20 scheme. A prompt action from the RBI, according to several news-outlets, would have led to an early-check on the PNB crisis.

The India Bullion Jewellers Association, an association found in 1919, wrote a stern latter to the then RBI governor- Raghuram Rajan explaining an anomaly in a Gold trading scheme.

The trading scheme called 80:20 was implemented barely five days before the Manmohan Singh led-UPA government's last day.

In the letter (images published by, the association alleged the gold scheme as one that encouraged gold hoarding, artificially inflated prices, and gave preferential treatment to 13 firms. The IBJA made its case by suggesting that the tweaked policy led to a surge in Gold, besides shady import practices. The result is a whopping Rs 12600 crore scam in the Punjab National Bank.

Additionally, the 80:20 Gold Scheme also gobbled up the good-will enjoyed by the Gold, Diamond and Banking industries. This at a time, when nationalised banks were already facing a debt-crisis.

What is the 80:20 Scheme:

The 80:20 scheme was launched in August 2013 with the intention of curbing rising gold imports. After crude oil, Gold remains the costliest drain on the government's import bills. According to the scheme, jewellers in the country could sell 80% of their imported consignments, and export the remainder 20% as Gold jewelry.

The CAG published a report claiming that the scheme resulted in a loss of Rs 1 lakh crore.

Prior to the 80:20 scheme the RBI relaxed norms for 13 star trading houses (companies who have huge export numbers). These firms accounted for as much as 40% of India's total gold imports in 2014. Until September 2014, only state trading houses and state-owned entities were allowed to import yellow metal.

A sub-committee of the Public Accounts Committee headed by BJP MP Nishikant Dubey has reportedly sought details from the Revenue Department and any alleged link with the PNB fraud.

The IBJA's Letter:

The IBJA accused the UPA government of yielding cronies by tweaking the 80:20 scheme days prior to its demittance. The RBI according to the association, side-stepped nationalised banks, by allowing star exporters to import gold up to two tonnes at one time, even for those who were not in the business of bullijon and gold jewellery.

The IBJA blamed that the 13 star trading firms used a circuit in trading, thereby resulting in a loss for the exchequer, and also resulting in a surge in Gold prices.

The IBJA in its letter says that India is an exporter of hand crafted gold jewellery, a high labour intensive industry. It took anything between 15 to 90 days to process jewellery before export. "But those with a different motive would procure gold, convert it into crude pendants or bangles or chains with the help of machines any quantity overnight and export into to Dubai the next day. In Dubai, it directly goes to a refinery for converting into gold bar and sold within 24 hours. The loss incurred in this operation is more than compensated by the trading in domestic gold," read the letter. 

An image of the letter written by IBJA. Image Credit:

Important observations from IBJA:

  • Gold Bullion before the 80:20 scheme could be imported only by state trading entities. Bullion dealers in a bid to make cash sales, lobbied for the scheme. They used various media outlets in order to pitch for a new policy.
  • Import duty does not impact exports. Gold jewellers importing Gold for exports get duty drawbacks on them.
  • Exports declined in 2014. The Gulf which was a major buyer from India, saw a decline owing to ISIS attacks on Iraq. Jewellers who participated in the 20:80 scheme used inflated balance sheets and defaulted by duping banks. Their acts impacted the gold jewellery.

The IBJA letter signed by its President Mohit Kamboj concludes by stating, "in national interest it is imperative upon the authorities concerned to make a prudent appraisal of the effects of the circular no. 133 dated 21-05-14 and check the loopholes before it is too late".

Did Rajan miss warning?

The IBJA blames the UPA government saying, "it is very clear that the outgoing government made some vested interest more equals among equals."

By writing a letter addressed to the Governor of the RBI, the IBJA believed that things could have been averted as early as 2014. Raghuram Rajan served as the governor until September 2016. But, the 80:20 gold policy continued for a couple of months until the Finance Ministry knocked off the policy (November 2014). Would it be wise to assume that this man could have prevented the 80:20 and therefore the PNB crisis? Another question that bothers is, how could this man who predicted the 2009 American crisis fail to spot something amiss with the 80:20 gold scheme?

Both questions do not limit the credibility of the sage professor, but beg to restore for the RBI's autonomous character- is the RBI's role only to bring up reports on the Indian economy? In the case of the 80:20 scheme it may be easier to blame the governor, but the RBI alone may not be held responsible for the Gold import scheme. Bureaucrats serving with the Finance Ministry, Commerce Ministry, and establishments such as Excise and Customs department that have more or less the same vision as that of the RBI. Shouldn't they be blamed and scrutinzed too?

Also read:

What makes Rajan believe that some of his actions will not be popular.

5 ways Raghuram Rajan could have saved the economy

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