Shiploads of gold cargo: Decoding the surge in imports
Calibration of import duty on gold has been an important instrument for policymakers in India to check imports, regulate the market for the precious metal and to manage trade deficit.
However, with the recent introduction of the Goods and Services Tax regime, imports have become difficult to check from free trade partner countries such as South Korea and Indonesia, which attract zero Customs duties on gold. This makes it important for India to be careful about the situation in future free trade negotiations with other countries and regions.
In the past, India has increased or decreased import duties on gold depending on what policymakers wanted. The current level of import duty on gold is 10 per cent, although the Commerce Ministry has been pushing for lowering it in a phased manner.
While the two free trade agreements signed with South Korea and Indonesia resulted in lowering of Customs duties on gold for these two countries to zero per cent, the Finance Ministry got around the situation by imposing a 12.5 per cent excise duty on domestic gold, which allowed it to impose an equivalent countervailing duty on imports.
The countervailing duties helped keep imports in check despite the zero Customs duty, but the GST implemented from July 1 changed things. As there is no provision for an excise duty in the GST regime, it was not possible to continue with the 12.5 per cent countervailing duty. It had to be replaced with a GST of just 3 per cent.
The lower duty resulted in a surge of imports from South Korea. Gold shipments from there between July 1 and August 3 this year were valued at about $339 million against imports worth $70.5 million in 2016-17.
On August 14, the Directorate General of Foreign Trade (DGFT) issued orders to stop exports of gold items over 22 carats as it was being suspected that traders were taking advantage of the duty-free imports from South Korea and were re-exporting the gold at higher prices without much value addition.
Gold imports into India increased almost 150 per cent in the April-August 2017 period to $15.26 billion compared to $6.11 billion in the April-August 2016 period, according to figures published by the Commerce Ministry.
With unabated increase in imports, the Commerce Ministry took an unprecedented step, which could have affected diplomatic relations with South Korea. Ignoring the provisions of the free trade pact, the DGFT banned duty-free import of gold from the country. Usually, it is almost impossible to take away a concession granted to a country in an existing FTA without re-negotiating it and giving something else away as compensation to the partner country.
One reason why India could get away with the unilateral change is because it could convince the South Korean government that gold was being routed into India through their country from third countries like Dubai, which wanted to take advantage of the zero duties.
While the move curbed imports from South Korea, imports from Indonesia, which earlier used to ship negligible amounts of gold to India, spiralled. Since Indonesia has its own gold quarries, India was not able to impose a ban on duty-free gold from the country by raising concerns about third-country imports.
As an additional measure to stop duty-free imports for re-exports, the Commerce Ministry in November imposed restrictions on import of gold by four and five star export houses by barring them as nominated agencies.
Such export houses, with valid licences, would be allowed to procure gold only if they are the actual users and not for re-sale.
Following the string of measures taken by the government since August and low domestic demand, gold imports in October 2017 dropped 16 per cent to $2.94 billion.