LEVERAGING GOLD IMPORT-FINANCIAL EXPRESS 28.05.2015
LEVERAGE GOLD IMPORT TO PUSH EXPORTS
LET BULLION IMPORTERS PURCHASE DOLLARS FROM EXPORTERS AT A PREMIUM
The recent budget proposals on gold monetization/loan and gold bond schemes will remain dormant like many other earlier attempts to lure Indian households away from accumulation of non-productive investments in precious metal. Not because that these instruments/proposals are irrational, but for the simple reason that Indian DNA seeks possession of physical metal rather than paper gold. The metabolic craving for possession of yellow metal cannot be substituted. Gold in Indian psyche is a religion, faith, security, tradition and love that are irreplaceable. No family wishes to discuss or reveal any information for the fear of so called “bad eye”. (Nazar lag jayye gee) This mind set is immutable.
Though detailing of budgetary announcement is yet to be notified, monetization of family jewellery through a bank is unlikely to be even marginally successful for the fear of disclosures in public domain.
The same would be true for purchase/sale of gold bonds calibrated to marked- to- market prices and nominal interest rate of 1%-2%. Then there is an apparent distrust of Government from issuing one amendment after the other—be it from RBI, DGFT or Finance Ministry. Assuming that official gold import are about 900 metric tons (Rs 216000 crores or $35-$36 billion) annually, Finance Ministry “estimates” selling gold bonds worth Rs 20000-Rs 40000 crores. This too amounts to highly presumptuous quantity of 85 to 170 metric tons. An estimate that varies or deviates by 100% evidences lack of professionalism and understanding of ground realities.
Custom duty of 10% will continue to be sore point in official imports. Imports in grey market will continue to sneak through, depending upon demand intensity and premium available locally.
Tracking gold purchases above Rs one lakh ($1612) through PAN at retail level will also not work as traders/jewellers can issue bills of less than Rs one lakh five times to cover one purchase of say Rs 4-5 lakh and so on.
Till 2013, or for about more than two decade, Government allowed unrestricted import of gold through banks and nominated agencies. Thereafter it experimented with cocktail of ideas of higher duty, export of jewellery and import of gold in 20:80 ratios, past performance basis etc. However collateral issues of smuggling, round tripping of jewellery, faking the CAD have cropped up. When India is the world’s largest market of jewellery, insistence on 20% prior exports was inconsistent with the ground realities.
In this environment full of contradictions, ideally the government should maintain the policy prescription of 2011-12 with 2% duty through nominated agencies only. Pressure for sugar coating CAD has withered owing to 50% fall in fossil fuel prices.
But why not leverage bullion imports to promote exports of other items. India’s export is about $320 billion and at current prices precious metal import is about $ 40 billion. Conceptually, bullion importers, including nominated agencies should purchase about $40 billion FX from exporters by paying a market determined premium. This premium earned by the exporter should assist competitiveness abroad, especially, when Indian goods/commodities are facing fierce downside price pressures. Import tariff can be abolished.
All exporters are issued 100% Bank realization Certificate (BRC) by the Banks-- a documentary receipt—for having realized export proceeds against invoiced shipments. All the finance Ministry/RBI needs to do is the following--
a) Banks to issue “split” Bank Realization Certificate (BRC) in two parts-- first one say of 10% and balance for 90% of exports proceeds of “any” commodity/equipment/services . 10% BRC to be issued in duplicate (one for the bank and the other for customs) and can be named as Bullion Bank Realization certificate (BBRC). BRC for balance 90% can be issued as usual. (Exporters will continue to be eligible for export benefits on 100% BRC.)
b) Indian exporter would have “discretion” to trade (sell) 10 % BBRC to any bullion importer/trader at a market premium by endorsement.
c) Banks to open import LC for bullion import upon surrender of BBRC. Custom copy of BBRC can be submitted for clearance from airport.
d) All banks may put data of availability of BBRCs with exporters on their website.
e) For consignment imports, remittances can also be done on the basis of BBRC.
Premium on BBRC will vary virtually on daily basis based upon demand pull in domestic market. This will stimulate higher exports of Indian goods/commodities without any subsidization. All nominated agencies and select trading houses will be at par with other importers who acquire BBRCs. BBRC premium will be billed to consumers.
Whether this will lead to elimination of smuggling? The answer is-- if market premium is 6%-7% the possibility of unofficial imports is remote. If the premium on BBRC escalates, grey market operators will be back in business and that would moderate BBRC premium. The fluctuations in premium will be self-balancing, depending upon market conditions. Government can also decide the percentage of BBRC—whether 10%, 12.5% or 15% etc. to regulate the premium.