After the government imposed a number of curbs on importing gold, imports of the precious metal slumped to $39 billion in 2013 from $53 billion in the previous year, according to Macquarie Research. This doesn’t, however, quite square up with the World Gold Council’s (WGC’s) numbers that said demand in terms of volumes grew 13% to 975 tonnes in 2013. Yes, gold prices had crashed by 28% in 2012, but that alone wasn’t responsible for the fall in import value.
While there are alternative sources for gold in India such as recycling existing gold and domestic production, WGC suspects the demand was fed by unofficial sources or smuggling. It estimates that smuggled gold accounted for 150-200 tonnes, or up to one-fifth of domestic demand in 2013. In its Gold Survey 2013 Update, Thomson Reuters GFMS also estimates annual unofficial flows in excess of 150 tonnes in India.
Other bits and pieces of evidence also point to a rise in gold sourcing through unofficial channels.
First, as Macquarie Research points out, the premium of Indian gold prices over the international price is nearly 16%, reflecting not just the 10% import duty, but highly restricted supply. That makes gold smuggling profitable.
Second, gold seizures have jumped five-fold to Rs.247 crore since the beginning of the fiscal year, according to provisional data by the Central Board of Excise and Customs.
Third, there has been a rise in gold imports in neighbouring Bangladesh, Pakistan and Sri Lanka. Gold imports to Pakistan increased 45% between July and December, indicating a surge in smuggling activity between the neighbours, said Macquarie Research.
“For this illicit trade to work, the payment for smuggled gold needs to be made through the informal financing route, mainly NRI remittances,” says Macquarie Research in a 3 March note. Indeed, private transfers, including remittances, have plateaued in the past year after rising sharply since 2008.
What’s the upshot? If indeed 200 tonnes of gold is being smuggled, that means the annual current account deficit is being understated by $8.5 billion (at today’s prices). That is almost 0.5% of GDP.