In the early hours of a Friday morning a couple of weeks ago, a businessman from Dubai arrived at the airport at Thiruvananthapuram in Kerala on an Air India flight, laden with 3 kilograms of smuggled gold worth 8.9 million rupees (Dh488,500).
Following a tip-off, the 29-year-old man, who comes from Kerala, was stopped and arrested by customs officers at the airport in India, which has become all too familiar with individuals trying to smuggle gold into the country from Dubai.
“His involvement is very clear and evidently he was prompted by the huge profits from selling the smuggled gold in the local market,” a customs official told The New Indian Express, a daily newspaper.
“During interrogation, he said he was transporting the gold for the first time. We are getting more information about the others involved in the crime.”
Gold smuggling into India has become a huge problem, following the introduction of higher import duties on the precious metal, which means there is significant money to be made by bringing it into the country via unofficial channels.
“Smuggling reared its head again after a gap of about 10 years in the year 2012,” Somasundaram PR, the India managing director for the World Gold Council (WGC), told The National.
In January 2012, the import duty in India was set by the previous government at 2 per cent, which was then doubled to 4 per cent in March of that year. A couple more hikes were introduced the following year, so that the import duty reached a record high of 10 per cent, which is where it stands today. This created an incentive for gold to be smuggled into India, to avoid paying the high duties and to reap greater profits.
About 175 tonnes of gold were smuggled into India in 2014, the WGC believes.
Gold smuggling had “practically disappeared” by about 2003 because the gold market was opened up and import duties had come down, says Mr Somasundaram.
“There was good economic growth and gold was freely available, so there was no need for anybody to smuggle gold,” he says.
Smuggled gold is brought into India via air from Dubai and Singapore, while the borders with Nepal and Bangladesh provide access points via land, and the precious metal is also smuggled into India on ships and boats.
Mr Somasundaram says that the rackets and networks that are bringing gold into India through unofficial channels are “very well organised” given the large quantities that are continuously flowing in,
“Obviously there are many elements – there is the supply element, the receiving, the handling, so there are various people involved,” he says.
Indian authorities have been striving to reduce imports of gold, which weighs on India’s current account deficit, which is why it raised the duties. The current government is equally keen to stem imports of the precious metal.
Much of the supply of gold in the country is kept in homes and is unproductive in terms of its role in the economy. The Indian prime minister Narendra Modi has described it as “dead money”.
Gold plays a significant cultural and traditional role in India, including in weddings and religious festivals, and many Indians – particularly in rural areas – use it as an alternative to the formal banking system to store their wealth.
About 22,000 tonnes of gold, worth more than US$1 trillion, is kept in homes in India, according to a report by the WGC and the Federation of Indian Chambers of Commerce and Industry.
Despite the efforts to reduce consumption, demand for gold in India last year increased by 2.5 per cent compared with the previous year, to 848.9 tonnes, an appetite that was surpassed only by that of China, data from the WGC shows.
Karnav Shah is the chief executive and founder of ChintalessNagrik, a grievance redressal service that allows consumers and citizens to file complaints against government departments, the police, and companies. He says that his organisation regularly receives complaints about gold smuggling, which sometimes allege that there are some customs officials who are involved and who profit from gold being brought into India illegally.
“Dubai and Singapore are the major supply centres for gold market and most of the travellers in south India come from these two places via air, while the majority of gold from Sri Lanka is smuggled through the sea route,” he says.
“The increase in import duty to 10 per cent on gold brought through legal channels and restrictions in procurement has made smuggling of the metal attractive, and thereby we have witnessed an increase in gold smuggling,” he adds. “There is a price difference of about 500,000 rupees per kg of gold purchased in India as against in Dubai after paying the customs duty.”
The weakness of the Indian rupee against the US dollar makes purchasing gold more expensive compared to buying it in the UAE.
“The nature of the unorganised gold jewellery industry, lack of transparency in commercial transactions besides any intervention for proper accounting are reasons for stashing smuggled gold in the market,” Mr Shah adds.
“Hence the government has created business opportunity for local merchants, custom officers, gangs and other stakeholders. Government policy is significantly responsible for gold smuggling to India as it provides incentive for the smuggler,” says Mr Shah.
Kumar Jain, who owns a jewellery shop in Mumbai and is the vice president of the Shri Mumbai Jewellers Association, says that the gold smuggling trend has a negative effect on his business because gold from illegal channels is sold at lower rates than he charges.
“There’s a good attraction for people to smuggle gold into India, so I think the government should think about reducing the 10 per cent import duty and bring it down to 5 or 4 per cent, and automatically smuggling will reduce,” Mr Jain says.
Mr Somasundaram says that gold smuggling is “debilitating”.
Apart from negatively impacting the Indian government because of the lost tax revenues, there are other effects on the industry.
“Let’s not forget that in India the organised channel is growing very fast. We want the organised market to grow. Also, you can’t trace the quality of gold when it is smuggled. The source of gold, nothing can be verified. That is tainting the entire supply chain. If you want to sell gold, today in India the biggest issue is you can’t trust any gold and you have to melt it. It stops gold from becoming a fungible asset class.”
As part of the efforts to reduce imports, in 2013, the Reserve Bank of India (RBI) introduced a rule that importers would have to re-export at least 20 per cent of the gold brought in. This measure was scrapped in 2014.
Mr Somasundaram says that the lure to smuggle gold into India did reduce after this measure was removed because the supply of gold in the country increased significantly.
“The incentive to smuggle continued but it came down dramatically from the peak of 2013 when you also had supply restrictions like 80-20.”
While the WGC estimates that 175 tonnes of gold was smuggled into India in 2014, Mr Somasundaram says that the figure may have come down by close to half last year.
With a recent jewellers’ strike lasting for almost two months, gold was discounted in India because of the reduced demand from jewellers, which further decreased the benefits of gold smuggling, he adds.
Jewellers across India went on strike and staged protests after India’s finance minister, Arun Jaitley, announced a 1 per cent excise duty on jewellery, including on gold and diamond items. The jewellers eventually backed down.
He says authorities are taking steps to crack down on the issue, which should help. There are greater efforts to seize gold being brought into the country illegally. In addition, jewellers with annual turnover of $1m rupees now have to reveal where they source gold from.
“Those jewellers will struggle to source gold from the unofficial market, so the government has taken some very decisive steps.”
But he adds that “this is such a trade that it will always find ways. The law-maintaining agencies will always be one step behind”.
He says that taxes on gold would have to be “rationalised” to remove the incentive to smuggle gold.
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