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The Gold (Control) Act, 1968 is a repealed Act of the Parliament of

India which was enacted to control sale and holding of gold in
personal possession. However excessive demand for gold in India
with negligible indigenous production is met with gold imports
leading to drastic devaluation of Indian rupee and depletion of foreign
exchange reserves to alarming levels. Devaluation of Indian rupee is
also leading to steep rise in food commodity prices due to costlier
petroleum products imports. In these circumstances, the gold import
policy of India aims at curbing the gold imports to manageable level
time to time by imposing taxes and legal restrictions.
Post-Independence, the foreign exchange drain was accentuated in
1962 during the border dispute with China. Morarji Desai, then
finance minister, came out with Gold Control Act, 1962, which
recalled all gold loans given by banks and banned forward trading in
gold. In 1963, the production of gold jewellery above 14 carat
fineness was banned. In 1965, a gold bond scheme was launched with
tax immunity for unaccounted wealth. All these steps failed to yield
the desired result. Desai finally introduced the Gold Control Act, on
24 August 1968, which prohibited citizens from owning gold in the
form of bars and coins. All existing holding of gold coins and bars
had to be converted to jewellery and declared to the authorities.
Goldsmiths were not allowed to own more than 100 gms of gold.
Licensed dealers were not supposed to own more than 2 kg of gold,
depending upon the number of artisans employed by them. They were
banned from trading with each other. Desai believed that Indians
would respond positively to these steps and stop consuming gold and
help conserve precious foreign exchange. New gold jewellery

purchases were either recycled or smuggled gold. This legislation

killed the official gold market and a large unofficial market sprung up
dealing in cash only. The gold was smuggled in and sold through the
unofficial channel wherein, many jewellers and bullion traders traded
in smuggled gold. A huge black market developed for gold. Gold
Smith were unorganised labour force and could not cope with the new
developed situation. Only a few could get the licence to hold the gold,
that also in very small quantity, with the result that the members
of Khudabadi Sindhi Swarankar community, who were depending
only on their traditional occupation of making gold ornaments, lost
their business and their financial condition deteriorated and families
In 1990, India had a major foreign exchange problems and was on
verge of default on external liabilities. The Indian Government
pledged 40 tons gold from their reserves with the Bank of England
and saved the day. Subsequently, India embarked upon the path of
economic liberalization. The era of licencing was gradually dissolved.
The gold market also benefited because the government abolished the
1962 Gold Control Act on 6 June 1990.[2] by Finance Minister Madhu
Dandvate and liberalized the gold import into India on payment of a
duty of Rs.250 per ten grams. The government thought it more
prudent to allow free imports and earn the taxes rather than to lose it
all to unofficial channel.[3] From official imports of practically nothing
in 1991, India officially imported more than 110 tonnes of gold in
1992, which now stands about 800 tonnes in a year.
In September 1999, the Govt. of India launched a Gold Deposit
Scheme to utilize the idle gold and simultaneously give a return to
gold owners and reduce the country's reliance on imports. However,
this plan was not widely accepted by the population.
Gold ETFs are also operating in India from March 2007. Alarmed by
the excessive gold imports by Indians despite the public holdings of
gold is in excess of 30,000 metric tons, Indian Government
introduced a new Gold Deposit Scheme with attractive benefits to the
gold depositors in the year 2015 to recycle the available idling gold in

the country for meeting internally the entire fresh ornamental gold
demand.[4] Government of India has nearly 550 tons of gold
reserveswhich would help in kick starting the scheme.

Crisis hedge not inflation hedge

When the inflation adjusted gold value is examined, gold is not a
inflation hedge but crisis hedge. Some times, gold price apparently
looks lower in US$ value but its price compared to corresponding
crude oil price can be nearly 25 times compared to long term average
of 15 times. Thus during the low oil prices period, gold acts as crisis
hedge to overcome the loss of revenue from oil exports to the oil
exporting countries. Similarly, it acts as crisis hedge to the oil
importing countries when oil prices are higher. In India, when the
agriculture production is good, it will lead to slump in the prices of
agriculture commodities and raise in gold price due to demand from
rural India. Similarly, when agriculture commodities prices raise due
to less production, gold prices would depress by lack of demand from
rural India. Thus by selling and purchasing gold, Indian farmer can
hedge / moderate the losses against profits over years of ups and
downs. This analogy can be applied to all commodities and gold can
be termed as super commodity with characters of international
currency. Indian Government or Reserve Bank of India also can
overcome the economic crisis by effectively managing the gold
reserves vis a vis food grain stocks or fertiliser stocks or crude oil

Indias Import Policy

Until the liberalisation of 1991, India was largely and intentionally

isolated from the world markets, to protect its economy and to
achieve self-reliance. Foreign trade was subject to import tariffs,
export taxes and quantitative restrictions, while foreign direct
investment (FDI) was restricted by upper-limit equity participation,
restrictions on technology transfer, export obligations and government
approvals; these approvals were needed for nearly 60% of new FDI in
the industrial sector. The restrictions ensured that FDI averaged only
around $200 million annually between 1985 and 1991; a large
percentage of the capital flows consisted of foreign aid, commercial
borrowing and deposits of non-resident Indians.India's exports were
stagnant for the first 15 years after independence, due to general
neglect of trade policy by the government of that period. Imports in
the same period, due to industrialisation being nascent, consisted
predominantly of machinery, raw materials and consumer goods.
Since liberalisation, the value of India's international trade has
increased sharply, with the contribution of total trade in goods and
services to the GDP rising from 16% in 199091 to 47% in 2008
10.India accounts for 1.44% of exports and 2.12% of imports for
merchandise trade and 3.34% of exports and 3.31% of imports for
commercial services trade worldwide.India's major trading partners
are the European Union, China, the United States of America and
the United Arab Emirates.In 200607, major export commodities
included engineering goods, petroleum products, chemicals and

pharmaceuticals, gems and jewellery, textiles and garments,

agricultural products, iron ore and other minerals. Major import
commodities included crude oil and related products, machinery,
electronic goods, gold and silver. In November 2010, exports
increased 22.3% year-on-year to 850.63 billion (US$13 billion),
while imports were up 7.5% at 1251.33 billion (US$19 billion).
Trade deficit for the same month dropped from 468.65
billion (US$7.1 billion) in 2009 to 400.7 billion (US$6.0 billion) in
India is a founding-member of General Agreement on Tariffs and
Trade (GATT) since 1947 and its successor, the WTO. While
participating actively in its general council meetings, India has been
crucial in voicing the concerns of the developing world. For instance,
India has continued its opposition to the inclusion of such matters as
labour and environment issues and other non-tariff barriers to
trade into the WTO policies.

Balance of payments

Since independence, India's balance of payments on its current

account has been negative. Since economic liberalisation in the 1990s,
precipitated by a balance of payment crisis, India's exports rose
consistently, covering 80.3% of its imports in 200203, up from
66.2% in 199091.[220] However, the global economic slump followed
by a general deceleration in world trade saw the exports as a
percentage of imports drop to 61.4% in 200809.[221] India's growing
oil import bill is seen as the main driver behind the large current
account deficit,[222] which rose to $118.7 billion, or 11.11% of GDP, in
200809.[223] Between January and October 2010, India imported
$82.1 billion worth of crude oil.[222]

Indian economy has run a trade deficit every year over 2002-2012
period, with a merchandise trade deficit of US$189 billion in 2011-12.
Its trade with China has the largest deficit, about $31 billion in
India's reliance on external assistance and concessional debt has
decreased since liberalisation of the economy, and the debt service
ratio decreased from 35.3% in 199091 to 4.4% in 200809.[226] In
India, External Commercial Borrowings (ECBs), or commercial loans
from non-resident lenders, are being permitted by the Government for
providing an additional source of funds to Indian corporates.
The Ministry of Finance monitors and regulates them through ECB
policy guidelines issued by the Reserve Bank of India under
the Foreign Exchange Management Act of 1999.India's foreign
exchange reserves have steadily risen from $5.8 billion in March 1991
to $318.6 billion in December 2009.In 2012, the United Kingdom
announced an end to all financial aid to India, citing the growth and
robustness of Indian economy.

Indias Import Policy: Procedures and Duties

In India, the import and export of goods is governed by the Foreign
Trade (Development & Regulation) Act, 1992 and Indias Export
Import (EXIM) Policy. Indias Directorate General of Foreign
Trade (DGFT) is the principal governing body responsible for all
matters related to EXIM Policy, and new guidelines on Foreign Trade
Policy (FTP) are expected to be released soon to replace previous
FTP guidelines that expired in March 2014.
Importers are required to register with the DGFT to obtain an
Importer Exporter Code Number (IEC) issued against their Permanent
Account Number (PAN), before engaging in EXIM activities. After an
IEC has been obtained, the source of items for import must be
identified and declared. The Indian Trade Classification

Harmonized System (ITC-HS) allows for the free import of most

goods without a special import license. Certain goods that fall under
the following categories require special permission or licensing,
Licensed (Restricted) Items: Licensed items can only be imported
after obtaining an import license from the DGFT. These include some
consumer goods such as precious and semi-precious stones, products
related to safety and security, seeds, plants, animals, insecticides,
pharmaceuticals and chemicals, and some electronic items.
Canalized Items: Canalized items can only be imported via specified
transportation channels and methods, or through government agencies
such as the State Trading Corporation (STC). These include petroleum
products, bulk agricultural products such as grains and vegetable oils,
and some pharmaceutical products.
Prohibited Items: These goods are strictly prohibited from import
and include tallow fat, animal rennet, wild animals, and unprocessed

Import Procedures

All importers must follow detailed customs clearance formalities

when importing goods into India. A comprehensive overview of
EXIM procedures can be found on the Indian Directorate of General
Valuations website.

Bill of Entry
Every importer is required to begin by submitting a Bill of Entry
under Section 46. This document certifies the description and value of
goods entering the country. The Bill of Entry should be submitted as
1) The original and duplicate for customs
2) A copy for the importer
3) A copy for the bank
4) A copy for making remittances

Under the Electronic Data Interchange (EDI), no formal Bill of

Entry is required (as it is recorded electronically) but the importer is
required to file a cargo declaration after prescribing particulars

required for processing of the entry for customs clearance. Bills of

Entry can be one of three types:

Bill of Entry for Home Consumption

This form is used when the imported goods are to be cleared on
payment of full duty. Home consumption means use within India. It is
white colored and hence often called the white bill of entry.

Bill of Entry for Housing

If the imported goods are not required immediately,
importers may store the goods in a warehouse without
the payment of duty under a bond and then clear them
from the warehouse when required on payment of duty.
This will enable the deferment of payment of the
customs duty until goods are actually required. This Bill
of Entry is printed on yellow paper and is thus often
called the yellow bill of entry. It is also called the into
bond bill of entry as the bond is executed for the
transfer of goods in a warehouse without paying duty.

Bill of Entry for Ex-Bond Clearance

The third type is for ex-bond clearance. This is used for clearance
from the warehouse on payment of duty and is printed on green paper.
It is important to note that the rate of duty applicable is as it exists on
the date a good is removed from a warehouse. Therefore, if the rate
changes after goods have been cleared from a customs port, the
customs duty as assessed on a yellow bill of entry (Bill of Entry for
Housing) and paid on the value listed on the green bill of entry (Bill
of Entry for Ex-Bond Clearance) will not be the same.

Other non-EDI DocumentsIf a Bill of Entry is filed without using the Electronic

Data Interchange system, the following documents are

also generally required:
Signed invoice
Packing list
Bill of lading or delivery order/air waybill
GATT declaration form
Importer/CHA declaration
Import license wherever necessary
Letter of credit/bank draft
Insurance document
Industrial license, if required
Test report in case of chemicals
Adhoc exemption order
DEEC Book/DEPB in original, where applicable
Catalogue, technical write up, literature in case of
machineries, spares or chemicals as may be applicable
Separately split up value of spares, components, and
Certificate of Origin, if preferential rate of duty is

Import Duties

The Indian government levies several types of import duties on goods.

These include:

Basic Customs Duty

Basic Customs Duty (BCD) is the standard tax rate applied to goods,
or the standard preferential rate in the case of goods imported from
specified countries. The rates of customs duties are outlined in the
First and Second Schedules of the Customs Tariff Act, 1975. The
First Schedule specifies rates of import duty and the Second specifies
rates of export duty. BCD is divided into standard and preferential
rates, with goods imported from countries holding trade agreements
with the Indian central government eligible for lower preferential

Additional Customs Duty (Countervailing Duty)

Countervailing duty (CVD) is equal to central excise duty and is
levied on imported articles produced in India. With CVD, the process
of production amounts to manufacture as it is defined in the Central
Excise Act, 1944. CVD is based on the aggregate value of goods
including landing charges and BCD. An additional CVD may be
levied equivalent to sales tax or VAT, not exceeding four percent. This
duty can be refunded if the importer pays all customs duties, the sales
invoice indicates the credit is not allowed, and the importer pays
VAT/sales tax on the sale of the good.
Other CVDs may be imposed on specific imported goods to neutralize
the effect of a subsidy in the country of origin. A notification issued
by the central government on these specified goods is valid for five
years and potentially subject to further extension not exceeding ten
years. Subsidies related to research activities, assistance to
disadvantaged regions in the destination country, and assistance in

adapting existing facilities to new environmental requirements are


Anti-Dumping Duty
The central government may impose an anti-dumping duty if it
determines a good is being imported at below fair market price, and
an importer will be notified if this is the case. The duty cannot exceed
the difference between the export and normal price (margin of
dumping). This does not apply to goods imported by 100 percent
Export Oriented Units (EOU) and units in Free Trade Zones (FTZs)
and Special Economic Zones (SEZs). If an importer is notified by the
central government then an Anti-Dumping duty is to be imposed, the
notification will remain valid for five years with the possibility of
being extended to 10 years.

Safeguard Duty
Unlike Anti-Dumping Duty, the imposition of Safeguard Duty does
not require the central government to determine a good is being
imported at below fair market price. Safeguard Duty is imposed if the
government decides that a sudden increase in exports is causing, or
threatens to cause, serious damage to a domestic industry. A
notification regarding the imposition of Safeguard Duty is valid for
four years with the possibility of being extended to 10 years.

Protective Duty
A protective duty is sometimes imposed to protect domestic industry
from imports. If the Tariff Commission issues a recommendation for
the imposition of a Protective Duty, the central government may
choose to impose this at a rate that does not exceed that recommended

by the Tariff Commission. The central government can specify the

period up to which the protective duty will remain in force, reduce or
extend the period, and adjust the effective rate.

Education Cess
Education Cess (a tax designed to fund education and healthcare
initiatives) is levied at two percent and Higher Education Cess at one
percent of the aggregate of customs duties. This does not include
Safeguard Duty, Countervailing Duty on subsidized articles, or AntiDumping Duty, however.


Procedure for Importing Gold into India

Indians love gold and gold is one of the major imports into India.
During financial year 2014-15, India imported 915.54 tonnes of gold,
recording an increase of nearly 38% compared to the previous year.
Majority of gold imported into India is in the form of gold bars and in
this article we look at the procedure for importing gold into India.

RBI Circular RBI/2013-14/187

The import of gold and gold dore bars into India is governed by the
RBI/2013-14/187, AP (DIR Series) Circular No. 25 dated 14.8.2013.
This circular superseded the customs circular No. 28/2009-Cus dated
14.10.2009 as far as the import of gold is concerned. Also, the import
of silver and platinum into India is governed by the Customs Circular
dated 14.10.2009.

Entities Allowed to Import Gold Bars into India

As per the RBI circular, import of Gold would be permitted only for
entities notified by the Directorate General of Foreign Trade (DGFT).
Currently, DGFT has permitted the following entities to import gold
bars into India.

Metals and Minerals Trading Corporation Limited (MMTC);

Handicraft and Handloom Export Corporation (HHEC);
State Trading Corporation (STC);
Project and Equipment Corporation of India Limited. (PEC);
STCL Limited;
MSTC Limited;
Diamond India Limited (DIL);
Gems & Jewellery Export Promotion Council (G&J EPC);

9. Star Trading House (only for Gems & Jewellery sector) or a

Premier Trading House;
Any other agency authorized by Reserve Bank of India

Conditions for Import of Gold Bars into India

The following conditions are applicable for all entities to import gold
bars into India:
Import of gold in the form of coins and medallions is prohibited.
Entities/units in the SEZ and EOUs, Premier and Star Trading
Houses would be permitted to import gold exclusively for the
purpose of exports. These entities will not be permitted to clear
imported gold for any purpose other than for exports.
Gold imported against any authorization such as Advance
Authorization/Duty Free Import Authorization (DFIA)
should be utilized for export purposes only and there can be no
diversion for domestic use.
All gold imports must be routed through customs bonded
The import of gold dore bars will be permitted only against a
license issued by the Directorate General of Foreign Trade;
Entities or units in the SEZ and EOUs, Premier and Star Trading
Houses would be permitted to procure gold from the refinery of
the license holder exclusively for the purpose of exports only
and these entities would not be permitted to clear such gold for
any purpose other than for exports.
For each consignment of gold dore bars imported, the license
holder must submit a report on utilization of gold dore bars,
gold produced after refining, gold issued to exporters and the

proof of export for the goods manufactured and exported by

these exporters to the central excise officer.


RBI came out with the 20:80 gold import scheme notification with an
intent to curb volume of gold import in the country and create a more
regulated domain for gold trading in India, but it ended up creating
confusion among all due to lack of clarity on various issues
The Reserve Bank of India (RBI) came out with a notification on 14
February 2014 revising the existing 20:80 gold import scheme
applicable to all the scheduled commercial banks, which are
authorised dealers in foreign exchange and all such agencies, which
are nominated to import gold. In this write up we intend to show the
new scheme after revision.

Existing 20:80 Gold import scheme:As per the existing scheme, the nominated agencies, allowed to
import gold, were allowed to import only if one-fifth of the quantity
of gold imported is used for export (however, supply to the SEZ units
will not be qualified as supply to exporters) and the rest of the fourfifth is to be utilised for domestic use and is to be supplied to only

those engaged in jewellery business or business of dealing in bullions

upon upfront payment. During the second lot of import, the importer
will be able to import such quantities, as that of the first lot, only if
one-fifth of the quantity imported in the first lot has been supplied to
the exporters. Again, the quantum of gold permitted to be imported in
the third lot will be restricted to 5 times the quantum for which proof
of export is submitted.
This scheme has been shown with the help of the following
Illustration I:
Lot I of Import Quantity of gold imported = 100kgs
Quantity of gold to be supplied to the exporters (A) =
100kgs x 20% = 20kgs
Quantity of gold to be supplied for domestic use (B) =
100kgs x 80% = 80kgs
Lot II of Import Quantity of gold to be imported =
*Such quantity to be permitted only if it is proved that (A)
has been cleared.
Lot III of Import Permissible quantity of gold
permissible for the purpose of import = 5 x Quantity of
export for which proof has been submitted.

Revised 20:80 Gold import scheme:Under the revised scheme, the importer will be able to import
gold in the third lot only to the extent of the lower of
i) Five times the export for which proof has been
submitted; or
ii) Quantity of gold permitted to a Nominated Agency in
the first or second lot.
The revised scheme has been shown with the help of the
illustrations in the following table.
Illustration II -

Lot I of Import
Quantity of gold imported = 100kgs
Quantity of gold to be supplied to the exporters (A) =100kgs x 20% = 20kg
Quantity of gold to be supplied for domestic use (B) = 100kgs x 80% =
*Lot II of Import
Quantity of gold to be imported = 100kgs
Quantity of gold to be supplied to the exporters (C) = 100kgs x 20% =
Quantity of gold to be supplied for domestic use (D) = 100kgs x 80% =

Lot III of Import

Permissible quantity of gold permissible for the purpose of import = Lower

5 x Quantity of export for which proof has been submitted = 5 x 40

(A+C) = 200kgs


Quantity of gold permitted to a Nominated Agency in the first or

second lot = 100kgs

Therefore, the permissible limit of import under the Lot III will be 100kg

We assume that before importing the second lot, the requirement of (A)
has been already fulfilled and consequently before importing the third lot
the requirements of (C) has also been fulfilled.
Illustration III -

Lot I of Import
Quantity of gold imported = 100kgs
Quantity of gold to be supplied to the exporters (A) =100kgs x 20% = 20kg
Quantity of gold to be supplied for domestic use (B) = 100kgs x 80% =

*Lot II of Import
Quantity of gold to be imported = 80kgs
Quantity of gold to be supplied to the exporters (C) = 80kgs x 20% = 16kgs
Quantity of gold to be supplied for domestic use (D) = 80kgs x 80% = 64kg

Lot III of Import

Permissible quantity of gold permissible for the purpose of import = Lower


5 x Quantity of export for which proof has been submitted = 5 x 36

(A+C) = 180kgs


Quantity of gold permitted to a nominated agency in the first or

second lot = 100kgs or 80kgs

Permissible quantity for the purpose of import = Out of the two

options, we should select the option (ii), however, nothing has been
mentioned in the notification for situations where the quantity of import in
the first lot differs from that of the second lot.
We assume that before importing the second lot, the importer could fulfil
only 80% of the requirement of (A) and the importer has been allowed to
import after reducing the quantity proportionately.
Other provisions in the notification:Apart from the above mentioned change in the scheme, the
notification lays down the following:

The imports made as part of the Advance Authorisation

(AA) / Duty Free Import Authorisation (DFIA) scheme will be
outside the purview of the 20:80 scheme. Such Imports will be
accounted for separately and will not entitle the Nominated
Agency/ Banks/Entities for any further import.


The Nominated Banks / Agencies / Entities may make

available gold to the exporters (other than AA/DFIA holders)
operating under the Replenishment Scheme. They can resort to
import of gold for the purpose, if considered necessary.
However, such import will be accounted for separately and will
not entitle them for any further import.

In any economy, if the volume of import increases, provided the
volume of export remains unchanged, the current account deficit
increases as well. We know that India is one such country which has a
very limited gold reserve and it mostly depends on imports, so it is
important to control the volume of imports to keep a check on the
current account deficit of the country. We understand that the RBI
came out with this notification with an intent to curb the volume of
gold import in the country and create a more regulated domain for
gold trading in India, but it ended up creating confusion among all
due to lack of clarity on various issues discussed earlier in this write
up. Though the RBIs attempt to do new things in order to stabilise the
India economy is very commendable, but if it fails to come clear,
then, we are afraid, none of its measures would work

Guidelines on Import of Gold by Nominated
Banks / Agencies
A.P. (DIR Series) Circular No.79
February 18, 2015
All Category - I Authorised Dealer Banks
Madam / Sir,
Guidelines on Import of Gold by Nominated
Banks / Agencies
Attention of Authorised Dealer Category I (AD
Category I) banks isinvited to the provisions
contained in A.P.(DIR Series) Circular No.42 dated
November 28, 2014 in terms of which the 20:80
scheme for import of gold was withdrawn in
consultation with the Government .
2. The Reserve Bank of India and the Government
have been receiving requests for clarification on some
of the operational aspects of the guidelines on import
of gold consequent upon the withdrawal of 20:80
scheme. Accordingly, in consultation with the
Government, the following clarifications are issued:
The obligation to export under the 20:80 scheme
will continue to apply in respect of unutilised gold
imported before November 28, 2014, i.e., the date of

abolition of the 20:80 scheme.

Nominated banks are now permitted to import
gold on consignment basis. All sale of gold
domestically will, however, be against upfront
payments. Banks are free to grant gold metal loans.
Star and Premier Trading Houses (STH/PTH) can
import gold on DP basis as per entitlement without
any end use restrictions.
While the import of gold coins and medallions will
no longer be prohibited, pending further review, the
restrictions on banks in selling gold coins and
medallions are not being removed.
3. AD Category I banks may bring the contents of this
circular to the notice of their constituents and
customers concerned.
4. The directions contained in this circular have been
issued under Section 10 (4) and Section 11 (1) of the
Foreign Exchange Management Act (FEMA), 1999 (42
of 1999) and are without prejudice to permissions /
approvals, if any, required under any other law.
Yours faithfully,
(B. P. Kanungo)
Principal Chief General Manager


RBI further eases gold import norms

The Reserve Bank of India has relaxed gold import norms in a bid to
ease the constraints being faced by the gems and jewellery trade.
The central bank said nominated banks are now permitted to import
gold on a consignment basis. When gold is imported on a
consignment basis, the ownership of the yellow metal remains with
the overseas supplier till a final sale is made to the customer and a
price is fixed.
The RBI said all sales of gold domestically will be against up-front
payments. Further, banks are free to grant gold metal loans. While
gold coin and medallion import, which was banned in August 2014,
will no longer be prohibited, pending further review, the restrictions
on banks in selling gold coins and medallions are not being removed,
the RBI said.
Star and Premier Trading Houses (STH/PTH) can import gold on DP
(documents against payment) basis as entitled without any end use
Under the DP route, an exporter instructs the presenting bank to
release shipping and title documents to the importer only if the latter
settles the accompanying bill of exchange in full.
The RBI clarified that the obligation to export under the so-called
20:80 scheme will continue to apply in respect of unutilised gold
imported before November 28, 2014.
Under the 20:80 scheme, at least 20 per cent of every lot of gold
imported into the country is exclusively made available for the
purpose of exports and the balance for domestic use.
Somasundaram PR, Managing Director, World Gold Council, said it
(the relaxation of gold import norms) is a step in the right direction.

In a move that will bring relief to jewelers and discourage smuggling,

the Reserve Bank of India has allowed banks to import gold in bullion
form on a consignment basis and given them a freehand in extending
gold loans. Importers who have been accredited as 'Star Trading
Houses' and 'Premier Trading Houses' can import gold on 'documents
against payment' basis without any end use restrictions.
A directive from the RBI on Wednesday eased much of the
restrictions on gold imports that were placed more than a year ago as
the country battled with a current account deficit that sent the rupee
into a free-fall. Although the price differential between domestic and
international gold will continue, the shortage of the yellow metal
created due to restriction will now vanish and could result in some
smuggling coming down.
In its pre-Budget memorandum to the government, the Federation of
Indian Chambers of Commerce and Industry had said that export
of gold jewellery has seen a 45% dip to $6 billion in the period April
2013 to February 2014 over the corresponding period last year and
smuggling had gone up because of quantitative restrictions on the
import of gold.

Gold Imports and Its Impact on Current Account Deficit

of India in the Post Reform
The liberalization policies followed by the government as per the
economic reforms introduced in 1991 had far reaching consequences.
The impact of these reforms could be best studied only a decade later
when started becoming evident. During the 1999-00 to 2012-13, gold
imports to India grew with a compound annual growth rate of 20.06%
. The current account deficit of the country increased with a CAGR of
23.3% during the same period. The gold imports turned out to be the

most important factor responsible for the high current account deficit.
As the government realized this fact, the policy makers suggested
increasing the gold import duty to curb the high gold imports
consequently restricting the high Current Account Deficit (CAD).
Gold has always remained a metal of significance especially in the
Indian subcontinent, including the other parts of the world. India is
currently the second largest consumer of gold in the world and is
heavily import dependent to meets its huge demand for gold. In the
recent years, the share of gold imports in total imports to India has
increased remarkably. The share of gold and silver together in total
imports was as low as 2.3% in 1995-96 while that of gold alone in
2011-12 reached to 11%. But this does not imply that India did not
import gold before the 1990s. Prior to 1991, the gold trading in India
was controlled by the Gold Control Act, 1968. Hence gold entered
into the Indian markets through smuggling. This is the reason why the
Indian official data on gold imports and those provided by World
Gold Council are inconsistent. This inconsistency arises because the
official figures do not take into the account the smuggling of gold into
India. In 1991, with the adoption of new economic reforms the Gold
Control Act was finally repealed and liberalized the gold import into
India on payment of a duty of Rs.250 per ten grams. Within fifteen
years of this liberalization, the gold import which did not even appear
in the BOP statistics of the country in the pre reform period, have now
grown to the level of more than ten percent of total imports. It is for
this reason that the impact of gold imports on the current account is
studied only for those fourteen years of the post reform period when
the effect becomes visible. These fourteen years were chosen because
in 1997 gold was placed under the open general license (OGL) to be
operated through commercial banks. A major step in the development
of gold markets in India was the authorization in July 1997 by the
RBI to commercial banks to import gold for sale or loan to jewellers
and exporters. Initially, 7 banks were

selected for this purpose on the basis of certain specified criteria like
minimum capital adequacy, profitability, risk management expertise,
previous experience in this area, etc. The number of banks later went
upto 18. Reform of the ban on gold imports also received attention in
the run up to the1992- 93 budget. Though there were no official
statistics, knowledgeable people agreed that most gold smuggling was
financed by the Hawala (unofficial/ underground) market. The
hawala operators had a network of agents in the mid-east and other
countries, who bought the remittance earnings of Indian migrants and
sold it to the smugglers. The rupee leg of the transaction was
completed in India by collecting the payments from the smugglers
agents in India and paying the beneficiaries of the worker remittances.
Thus it was essential to liberalise gold imports to eliminate smuggling
and ensure that labour remittances to India were sent through official
rather than Hawala markets. This would reduce the size of the
Hawala market and strengthen the newly liberalised market
exchange rate channel. Import of gold by banks authorised by the RBI
has succeeded to a large extent in curbing illegal operations in gold
and in foreign exchange markets. It has also resulted in reducing the
disparity between international and domestic prices of gold from 57
per cent during 1986 to 1991 to 8.5 per cent in 2001. The appearance
of high gold import figures in the calculation of BOP of the country
has directly influenced the current account of the country. The current
account has been effected by gold imports to such an extent that if
gold and silver imports are excluded, the current account would have
ran into
surplus for three consecutive years 2004-05 to 2006-07. Forex
reserves are used as the last resort to finance the current account
deficit if the capital account surplus is not enough to cover it. And
depleting forex reserves directly impacts the external sector stability
of the economy. Thus the gold imports which are mainly responsible
for the hike in CAD will have to be kept within limits. Also it is

important to note here that in spite of India being the largest importer
of gold in the world, its share in total reserves of the country is lower
than that of USA and UK. This implies that whatever gold is imported
is utilized to fulfill the huge demand for gold of the Indian consumers.
Indias forex reserves are 8.81 percent of Chinas forex reserves yet
its gold demand is more than that of China by 37.6%.
During the pre liberalization phase the import of gold to India was strictly
controlled as per the Gold (Control) Act 1968. The gold policy was devised in
such a way so as to discourage people from purchasing gold, reducing domestic
demand, regulating supply of gold, curbing smuggling and black income and
conserving foreign exchange. The smuggling of gold on large scale implied that
gold entered into the Indian markets through unofficial channels.
This is the reason for non availability of official data on gold imports. These
restrictive policies gave way for a more liberalized gold market in the post
liberalization period. Even after the introduction of economic reforms,
inconsistency is observed between official data on gold imports and data
compiled by the World Gold Council. In the post liberalization period efforts were
made to integrate the gold market with financial market.
In the post liberalization period the demand for gold increased to such an extent
that the Indian consumer demand for gold was 37.6% more than that of China
while Indias forex reserves were only 8.81% of Chinas forex reserves in 2011. In
the same year India accounted for nearly one-third of the total world demand for
gold. A steep increase in gold imports is noticed during the post financial crisis
period (2009- 10 onwards).



It is important to note here that today gold imports

account for more than 10% of Indias total imports
which is too much a share for non bulk item in Indias
BOP. Gold imports constitute of nearly a third of Indias
trade deficit. During 1999-00 to 2012-13, the current
account deficit of the country grew at a compound
annual growth rate of 23.3%. Correspondingly, the
volume of gold imports increased at a CAGR of 20.06%.
As shown in the table below, the entire period of 14
years is divided into three parts. The first stage (199900 to 2003-04), the second stage (2004-05 to 2008-09)
and the third stage (2009-10 to 2012-13) covers the
entire period. It was only during the last three
consecutive years of the first stage that the Indian
economy witnessed a current account surplus which
rose consistently at the CAGR of 60%. In the next year,
that is 2004-05, there was a current account deficit and
the percentage share of gold imports in total imports
also increased by around more than one per cent
Throughout the period under consideration the volume
of gold imports kept rising almost consistently, this rise
was perfectly consistent in the second stage (2004-05 to

2012-13). The volume of gold imports increased at a

CAGR of 17% which is less than the CAGR of gold
imports. Thus gold imports grew at a faster pace than
total imports. An important observation that can be
made here is that from the year 2007-08 to 2011-12,
both the current account deficit and the volume of gold
imports kept rising consistently. As we move from the
first stage to the second stage a steep rise is noticed in
the volume of gold imports from $6516.9 million in
2003-04 to $105377.7 million in 2004-05. The rate of
growth of gold imports was largely positive for the
entire period. In the table shown above a decline in rate
of growth of gold imports is noticed from 11.5% in 201011 to 10.9% in 2012-13.this decline was a much
predicted one due to the higher import duties imposed
on gold by the government and subdued economic
performance of the country


The left graph above shows the rising trend of gold

imports during the fourteen year period from 2000-01 to
2012-13. The right one shows the trend followed by the
current account deficit of the country for the same
period. Both the variables are showing the same trendboth are rising and the rise has been particularly steep
in the recent years. The following reasons are
responsible for the increase in gold imports of the
country : The rise in gold imports does not imply just
an increase in the volume of gold imports but it also
reflects the rise in gold prices. The uncertainty in real
estate and equity markets has made gold an attractive
investment for the Indian consumers. There is lack of
alternative financial products especially in the rural
areas -which makes the rural people to go for hoarding
of such quantities of gold which is beyond their need for

jewellery. This is the reason why close to seventy

percent of the gold is sold in rural areas.

Gold is viewed as a safe asset especially during periods

of financial and economic stress. Gold has always been
imported into India but the official data are available
only for the post liberalization period when trading in
gold was liberalized. This is also one of the reason for
increase in gold import figures in the BOP of the country
in the recent years. The effect of repealing the Gold
Control Act and opening up of trade in gold has become
visible now. The performance of gold has been better
than that of other domestic assets over the last few
years. In the last five years, gold has never given
negative returns. Gold is also bought for its high
liquidity and as an inflation hedge (relatively lower
volatility of gold prices). This is because gold imports to
India are relatively price inelastic). Since gold is being
utilized by the households in the form of jewellery or

Indias Gold Smuggling Problem:


Unofficial Gold Market Shows Little

Sign of Slowing, So Long As Import
Duties Stay Put
Indian government attempts to calm a robust flood of gold imports with
blunt policy instruments and import duty hikes this year have actually
boosted gold smuggling into the country, industry experts told
International Business Times.
Indian gold smuggling has jumped significantly this year, after a series of
import tax hikes, obscure export rules and outright quotas have made it
difficult to trade the precious metal openly.
Official gold regulations, which include five duty hikes from 1 percent in
January 2012, to the current 10 percent levy as of August 2013, stem
from the governments struggle against record current account deficits,
led partly by massive gold imports.
India is the worlds largest consumer of gold, though China is on track
to steal that title by year-end.
Smuggled gold into India is likely to reach 200 tonnes in 2013, up 50
percent from 2012, estimated World Gold Council managing director
Marcus Grubb, in mid-August.
Government controls have forced up local premiums but arent effective
in curbing persistent demand, he recently told IBTimes.


Of course the government is trying to improve the current account

deficit. But basically all it is doing is increasing the price of gold to the
consumer, and increasing the amount of unofficial gold coming in, he
Overall, it cant affect the demand. In the end, thats cultural. Its about
saving assets, for the wife and the family, and is linked to festivals and
weddings, Grubb said at the time.
September traditionally kicks off a strong season for gold buying in
India, as the festival calendar fills up for three months. Indian farmers
have also benefited from a bountiful monsoon season this year, leaving
this key major portion of Indian gold consumers with even more cash for
Government officials accordingly clarified obscure import rules in early
September, initially issued in July, which said that gold importers must
export 20 percent of all gold theyd imported.
The clarifications were directed at lifting a two-month hiatus on Indian
gold imports, which has frustrated market traders this summer.
Though those measures are helpful, alone they won't be enough to stop
gold smuggling, Harish Soni, chairman of the All India Gems and
Jewellery Foundation, told IBTimes.
The upwardly sliding import duties, from 1 percent to 10 percent, have
dampened the official gold trade and spurred the unofficial market, Soni


Earlier, at the time of 1 percent duty, there was no smuggling at all, he

said. Whatever we used to import were official imports.
Although Soni said data on smuggled gold was hard to obtain, he noted
increasingly aggressive customs checks at airports this year, geared to
screen out gold smugglers.
Illegal gold seized at airports and other border checks have increased
nine or tenfold this year, Soni said, citing anecdotes from industry
sources and news reports.
They are just very aggressive right now, at all the international
airports, he said. Randomly, they are checking all the passengers.
Its unclear where the smuggled gold comes from, though industry
experts suspected that border nations like Pakistan, Bangladesh and
Nepal were key transit routes.
The government has set a target of keeping official gold imports to 850
tonnes this year, at roughly similar levels to last year.
Indian officials project that 11 percent less gold could be imported this
year, thanks to their measures, reported Reuters, even as local prices hit
a record high on Aug. 28.
Visible differences in local prices and international prices look set to stay
for the short term, according to industry experts.
There has been an alarming rise in the gold smuggled into the country,
gold and commodities strategist G Srisatsava, of Foretell Business
Solutions, which organized Indias 2013 International Gold Convention,
said in an email to IBTimes.


With 10 percent customs duty and 1 percent VAT, plus insurance, the
premium over London is at least 11.3 percent The incentives are fairly
high, he wrote.
Industry figures polled at the mid-August convention also estimated that
200 to 300 tonnes would be smuggled into India over the next 12
months, in line with World Gold Council estimates.
With regulations restricting supply and more arbitrage between sharply
different Indian and international prices, We hear of the gray market
starting again in a big way, the councils India managing director PR
Somasundaram told IBTimes.
All that stuff you used to hear about in the 1980s: now its all coming
back, Somasundaram said, referring to the peak of Indian gold
smuggling prior to gold regulations imposed in the 1990s.
Earlier this week, the Indian government raised the import duty on gold
jewelery from 10 percent to 15 percent in a bid to protect the domestic
jewelery industry, the BBC reports.
The government has also considered encouraging gold recycling by

commercial banks, which could work if banks buy gold from

individuals at better prices than pawn shops and jewelers.
That move could help dampen any sudden price rises in Indian gold,
wrote HSBC Holdings PLC (LON:HSBA) gold analyst Jim Steel, in early
Even given proactive moves and good intentions by regulators as well as
helpful import-export clarifications, theres ample room for uncertainty
and frustration as the market moves into the final leg of the year.

Given the increased number of steps and amount of paperwork

involved, it appears that the whole process of bringing gold into India
will now take a considerably longer time than before, UBS AG
(VTX:UBSN) gold analyst Joni Teves wrote in early September, referring
to the new system involving government sanctioned warehouses, where
gold must stop before it is released into local markets.
The coming three months will be the peak season for Indian markets,
Soni said. If the government is not releasing imports on time, then,
definitely, the gray market will flourish.