Indian government has imposed a duty of ~11.3% on gold imports. Additionally, they have created bureaucratic complexities, including a requirement from gold importers to export 20% of their imports. The government claims that this has resulted in a serious drop in imports, something they wanted, given consistently high, unsustainable current-account deficits.
As I write this, international spot price of gold is $1,300 per ounce. In India, however, it is trading at a premium of 18%, at a price of $1,534. One might ask who is pocketing this premium. Has import really come to a stand-still? Let me explain the ground realities.
Recently, I arrived in the Indian city of Chennai from Singapore. My bag was missing, which had nothing of commercial value—just my clothes. The airline had me fill out a missing-bag form. When I went to a custom official to get the document signed, he asked me to pay a custom duty on the claimed value of my clothes. He didn’t want to understand that the fact that my bag did not arrive made no difference to whether they were dutiable or not.
Every Indian public servant I have ever met creates a situation to ask for a bribe. The result is that there are all sorts of leakages in any regulatory enforcement. Indeed, most regulations exist for the sole purpose of creating justifications for them to ask for bribes.
Before the 90s, import of gold was heavily regulated and carried massive custom duty. Of course, those days most gold arrived in India through smuggling. A big mafia had built up in Mumbai and Dubai, mostly catering to India’s gold demand. Two things happened as a result: Government lost all prospects of earning revenue from gold imports, and most importantly, smugglers ran a ruthless empire in several Indian cities, particularly in Mumbai, controlling human-trafficking (with horrible consequences for poor girls and children), and financing the real-estate and the film industries. They were the unofficial rulers of Mumbai. When restrictions on gold were eased in early 90s under pressure from IMF, the same smugglers took the shape of what got to be known as terrorists. (All this should not sound strange to those who understand the history of prohibition in the US). >> Read More