Exporters of gold jewellery involved in round-tripping before the Reserve Bank's (RBI) curbs on import of gold, which began in May, seem to have shifted focus to round-tripping of diamond-studded gold jewellery.
Round-tripping is exporting of goods without much value addition, to avail cheaper export finance from banks and show a higher export performance to get the benefits of a star trading/export house.
Traders have started questioning the export figures by the Gems & Jewellery Export Promotion Council (GJEPC) under the commerce and industry ministry.
Since bank lending is based on a company's turnover, certified by actual shipments of goods, exporters take advantage of multiple exports of the same goods.
"The actual quantity of export should be much less than the figures by the ministry," said a sector veteran.
"We do not encourage trading activities. We are not averse to actual import and export of the raw material or finished products. We want the government to stop funding trading which does not create any value to our country," said Vipul Shah, chairman of GJEPC.
Earlier, RBI allowed duty-free import of semi-cut and processed diamond imports to bonded warehouses. According to trade sources, it has got 80-90 applications for setting up such warehouses. A large number have been approved. Consequently, import of rough and polished diamond has increased in bonded warehouses for re-export; these attract no export duty, similar to shipment from Special Economic Zones (SEZs).
In contrast, exports from the Domestic Tariff Area attract two per cent export duty. RBI, however, mandated at least 5 per cent value addition from the goods exported from bonded warehouses. Since there is no agency deputed to track actual shipment from these warehouses, exporters import processed goods for re-export without meeting the value addition clause, it appears.
"Consequently, import of cut and polished diamonds has jumped into both SEZ and bonded warehouses, which triggers trading activities instead of manufacturing in India, which claims to be processing 12 out of 13 rough diamond produced in the world," said Pankaj Parekh, vice- chairman of GJEPC.
Import of polished diamonds has been Rs 534 crore in the first five months of this financial year. Since RBI granted permission to create bonded warehouses in April, no comparative figure is available.
Exporters are taking advantage of some loopholes. As mentioned, since the five per cent value addition norm in bonded warehouse cannot be ascertained, banks rely upon what exporters claim. Industry players, therefore, met RBI chief Raghuram Rajan early this week with a request to stop financing on consignments from bonded warehouses.
They've also warned of a Winsome-type default, which could cast a shadow on the entire jewellery business, said Parekh. Winsome, a Mumbai-based jewellery company, had defaulted some months earlier on Rs 4,000 crore of bank loans, saying customers in the Gulf region hadn't repaid on time.
"We have also suggested RBI consider allocation of gold from the exportable 20 per cent quantity under the 80:20 formula if supplied directly in lots to manufacturers in SEZs," said Parekh.