India’s love affair with gold, bordering on obsession, continues unabated. The demand for gold never seems to decline. Licit imports of gold are in the range of about 750 tonnes annually. As per the Reserve Bank of India’s half-yearly report on foreign exchange management, the RBI has 794.64 metric tonnes of gold as on March 2023. In value terms, the share of gold in the total foreign exchange reserves is at a high of nearly 7.81 per cent.
Our foreign exchange reserves at the end of April 2023 were at $588.78 billion, the fourth largest in the world. As per the Finance Minister Nirmala Sitharaman’s Union budget speech 2015-16, approximately 20,000 tonnes of gold were said to be available domestically—gold which was neither traded nor monetised. A 2018 Niti Aayog report, 'Transforming India’s Gold Sector’, has however estimated that 23,000-24,000 tonnes of gold is lying unused in the vaults of banks, with households and religious institutions throughout the nation.
Several policy measures were put in place in the hope of attracting this unused gold to come out in the open. November 2015 witnessed the launch of three schemes—the gold monetisation scheme, (GMS) the sovereign gold bond scheme, and the India gold coin.
As per a study by the India Gold Policy Centre at IIM, Ahmedabad, about 22 tonnes of gold has so far come under GMS—a very small percentage of the 23,000-24,000 tonnes of gold said to be in the economy. In early 2021, GMS was revamped (R-GMS). We are currently in the series IV of the RBI’s sovereign gold bond scheme—yet another scheme to attract investments in gold. This is apart from the Gold ETF which mutual funds offer.
There is also the hallmarking scheme. The Bureau of Indian Standards (BIS) Act was amended to provide for the hallmarking sale of gold jewellery, whereby unique identification numbers guaranteeing purity are provided to each piece of jewellery. There are currently about 950 hallmarking centres across the country.
The fond hope behind all these initiatives was that citizens would bring out the gold lying dormant to take advantage of these schemes. Implicit also was the belief that smuggling would consequently come down.
Yet smuggling continues, through land, sea and air.— concealed in body orifices, in vehicles, in machine parts, as molten metal, in paste form. (World Gold Council would have us believe that up to 160 tonnes of gold is smuggled into the country.) The ingenuity of smugglers is matched only by the customs officer’s alertness. The Lok Sabha was informed in 2023 that 3,982 cases of smuggling of gold were detected in 2022 leading to the seizure of 3,502.16 kg of gold and the arrest of 1,710 persons, with Kerala having the highest number of cases. Seizures admittedly represent a small portion of what has been smuggled.
Demand accompanied by supply restrictions imposed by tariff barriers fuels smuggling. We initially restricted all import of gold. That was the era of unbridled smuggling, of Haji Mastan and a young Dawood Ibrahim. We liberalised. Import was permitted at a specific rate of Rs 300 per 10 gm—this translated to about 1 per cent and dramatically reduced smuggling. We today have a 7.5 per cent basic custom’s duty rate. There is in addition an Agriculture & Infrastructure Cess, a social welfare surcharge, and Integrated Goods & Services Tax (IGST). Smuggling reduced, but it did not stop.
Smuggling, at the end of the day, is a trading activity. When there is demand and restriction in any form, supply will seek to evade these restrictions to garner increased profit. All the elements were always there in the case of gold. Unsatiated demand, restrictions in the form of customs duty, opportunity in the form of a 7,516.6 km coastline, a 15,200 km land border largely porous, and multiple international airports ensure that there is a steady illegal flow of gold. Even with the reduced basic customs duty, the profit available in smuggling gold more than made up for the risks.
Smuggling has a multiplier bad impact on the economy. It results in the loss of legitimate jobs. There is an obvious loss of customs revenue to the government. Smuggled gold, when sold in the market, generates money that is outside the tax net. Some portion of the proceeds are transmitted back to the controller of the smuggling operations through illicit channels—‘hawala’—or by resorting to trade-based money laundering. The remaining portion of the proceeds remain in the country and finance other criminal activities.
Most of the licit imports into the country come from Switzerland. Dubai is the major source for all the smuggled gold coming into the country, either directly or via Bangladesh, Nepal, Myanmar or Sri Lanka. Gold is much cheaper in Dubai compared to India, making smuggling very attractive. The challenge has always been to strike the right balance—impose a duty high enough to reduce imports and conserve foreign exchange, but not so high that smugglers feel emboldened to take the risk.
Whenever rural India does well economically, there is a surge in demand for gold. There is also the large problem of unemployment in the country. All these— the demand, price difference, a large unemployed restless population who would for a pittance work as carrier mules to smuggle the gold—suggest that smuggling will continue.
The World Economic Forum ( WEF) estimates that that illicit trade globally results in an annual drain of $2.2 trillion—approximately 3 per cent of the world GDP. Prof Arun Kumar, India’s leading authority on the black economy, has in the context of India estimated its size to be 62 per cent of GDP at 2016-17 prices, or about Rs.93 lakh crore. To put this in context, this is larger than the income generated by agriculture and industry put together. Not all of this humongous amount is generated by the smuggling of gold. As per the reply to a parliamentary question on February 7, 2023, the Enforcement Directorate has identified Rs. 2,116 crore under the provisions of the Prevention of Money Laundering Act (PMLA). How much of this represents the sale proceeds of smuggled gold is unclear. As per the DRI Annual Report 2022, the National Investigation Agency (NIA) has filed charge sheets in three cases of gold smuggling. What this would suggest is that there is a nexus at least in some cases, between gold smuggling and terrorism related activities.
Given the fact that most of the cases of gold smuggling originate from Dubai, this is significant. Many of India's wanted persons for terrorist activities are based in Dubai or have strong Dubai connections, and very many of them are in gold smuggling. The Carnegie Endowment for International Peace, in a 2020 report, highlighted Dubai's role in facilitating corruption and illicit financial flows.
So, while enforcement agencies should continue their vigil and DRI can launch its various anti-smuggling operations with exotic names (Golden Dawn, Eastern Gateway), we would also need to look at other policy measures. Given our healthy foreign exchange reserves, it is time to take a relook at the duty structure. We could reduce the basic customs duty of imported gold—reduce it enough to make the risks of smuggling not worthwhile. There should be a robust system of tracing licit imports of gold all along the value chain. This is essential to ensure that gold stays in the licit economy.
The R-GMS needs to be relooked at. The interest of 2.5 per cent which the scheme presently offers is too low to be attractive. A provision should be made in the R-GMS to give back the gold article in its original form if the depositor so desires. This is especially true in respect of ornaments which are family heirlooms.
At the cost of repetition, we should never forget that the lure of gold is cultural. We would need to generate awareness, especially among the younger generation, that gold is nothing but a shiny metal. While the value of currencies can be determined in terms of the gold reserves a country holds, the value of individuals need not be.
(Najib Shah is the former chairman of Central Board of Indirect Taxes & Customs)
