How, What & Why India needs to do to Improvise it’s Gold Market

How, What  Why India needs to do to Improvise it's Gold Market

Indians rush to Buy Gold from Dubai

Indians are back to buying gold from Dubai. After the introduction of a 3% goods and services tax in India, buying gold jewellery in Dubai has become more lucrative.

Jewellers, with a presence in the United Arab Emirates and the Gulf region, said purchase of gold by Indians travelling to Dubai, NRIs and Indian expats living in the region has increased after the new tax regime was rolled out on July 1.
There is a perceptible rise in the sale of gold in the UAE market in the past two weeks and Indians are among the hot buyers, according to Ahammed MP, chairman of Malabar Gold Diamonds.

“The immediate trigger is the revised tax structure for gold in India. UAE price continues to be much lower in comparison,” Ahammed told ET. He said three categories of Indian buyers are buying more gold in Dubai -those settled in the Gulf, Indian tourists to the Middle East and transit passengers travelling from the US and Europe.

“Singapore and Sri Lanka are also witnessing increased buying interest for gold from Indian travellers,” Ahammed said.

Jewellers estimate the increase at 5-10 per cent. “Shopping for gold in Dubai, especially with a 13 per cent difference, is more lucrative and this will divert some business from India to Dubai,” said Rajiv Popley, director of Popley Sons. Gold purchased in India is costlier by Rs 3,600 per 10 gm than in Dubai.

The gold price at Zaveri Bazar is quoted at Rs 29,210 per 10 gm, inclusive of import duty and GST, whereas the cost in Dubai is Rs 25,524 per 10 gm. Jewellery will remain costlier in India even after the planned imposition of 5 per cent VAT in the UAE from January 2018. – Sutanuka Ghosal

Government can easily clean up Gold Market in India

The gold market in India is in a mess.  Smuggling continues big time.  Seizure of smuggled-in-gold barely accounts for 3% of volumes each year. Corrosion within the vaults owned and managed by the customs department — where gold is stored — is now in evidence. International buyers of Indian jewellery are wary because of the prevalence of gold adulteration in this country (documentation on all the above can be found at http://www.asiaconverge.com/2017/07/duties-taxes-corruption-government-abets-smuggling-gold/). Today, almost 90% of the gold in the markets is adulterated. Surveys in 2006 showed that the adulterated content was around 13% then.  Today it could be significantly higher.

So, can the situation be remedied?

Yes, if there is political will, and the willingness to take a fresh look at gold markets. That is what Turkey did a couple of dacades ago, and quite successfully (http://www.asiaconverge.com/2015/01/turkey-could-teach-india-a-thing-or-two/). In fact there are three things that the government should do. Immediately.

First, it is imperative that the government reclassifies gold as a financial investment.  True, it comes under the finance ministry today.  This was unlike the past when it used to be considered a commodity and came under the ministry of consumer affairs. But it is still treated as a non-financial instrument. Most poor people, even small businesses, use gold as collateral to borrow urgently needed money.  The growth of gold loan companies provides evidence of this need.  Even SBERBank, the largest bank in Russia – which now has an office in New Delhi — has applied to the government to permit it to enter the gold loan market (http://www.asiaconverge.com/2017/04/making-sberbank-relevant-to-india/).

Making it a financial investment allows for the application of the Indian Penal Code provisions (Section 489-A) relating to FICN (fake Indian currency notes). They allow for life imprisonment and make the act of fraud a non-bailable offense (http://www.indianlawcases.com/Act-Indian.Penal.Code,1860-1951).

No fresh laws have to be written or passed. There is no need to create a new legal structure. Just the re-classification of gold as a financial investment should do the trick. That will give teeth to hallmarking, which is now compulsory for all gold jewelers.

Second, brush the dust off the report the RBI submitted to the government in 2013. Titled Report of the Working Group to Study Issues related to Gold Imports and Gold Loan NBFCs in India,.  it was chaired by K.U.B Rao (hence the report is also popularly referred to as the KUB Rao report). It recommended the formation of a separate body for gold,The Bullion Corporation of India (BCI). This entity would look at all aspects of gold, and create proper rules that could ensure both fair play and growth for the industry. Given that Rs.141,000-340,000 crore worth gold is imported each year (see table), the need for a separate professional body is imperative.  As the BCI would function under the RBI, all the gold stored in customs vaults – from where theft sometimes takes place  – would go to the RBI or get auctioned promptly.

Third, and most important, the government needs to reduce the import duty on gold. Remember,  it used to be just Rs.100-250 per 10 grammes earlier.  Smuggling – if any — had definitely slowed down then.  Unless this is done, smuggling will remain attractive.  It will also help build a channel for smuggling in of drugs and arms.

This author recommends the imposition of 1% duty – but only if gold is purchased by banks and designated bodies.  Anyone trying to import gold through other channels would still be subject to a 10% duty.

These designated bodies then get the imported gold verified by certified gold refineries (because even imported gold can be contaminated).  The refineries in turn would then sell to wholesellers. This category could be defined as people willing to buy more than two tonnes a year, with suitable bank guarantees as well. The refiners and wholesellers would be responsible for ensuring that hallmarking (http://www.bis.org.in/cert/hallbiscert.htm) is scrupulously followed by the entire trade.  Where there are lapses, the incident would automatically get subjected to FICN related investigations and procecutions.

But won’t the 1% import duty and 4% of GST make the government lose some revenue?  Yes.  But such losses would be notional.  In fact, the government could gain a lot more compared to what the customs department may lose. Our estimates show that the government would lose around 10,000-15,000 crore (see table) compared to what they collect under the 10% import duty.

Even that is a notional loss.  The amount the government could lose if smuggling remains rampant could be a lot more. If duties are not reduced, gold smuggling would also encourage smuggling in of arms which could jeopardize national security.  This is because the profits from gold alone will permit smugglers to create a clandestine channel. This channel would identify transporters, routes, landing points, compliant officials and runner boys for gold marketing. Once a channel is set, it is invariably used for smuggling in arms as well.

That is why, gold import duties need to be reduced. Unless that is done, the adverse effects will make the country pay a very high price. – RN Bhaskar

IBJA submits draft of good delivery rules to government

India Bullion Jewellers Association (IBJA) has submitted the draft of the `Good Delivery Rules’ for gold and silver bars to the government.The good delivery bar is to be produced by Indian refiners by adhering to quality standards followed by global benchmark LBMA.

The rules on networth and quantity followed by LBMA will be diluted as most gold refiners here lack the economies of scale existing overseas, said Rajesh Khosla, director, IBJA. ET had first reported about an India Good Delivery Gold Bar in its edition of April 24, 2017.

IBJA has called for public comments on the draft over the next two weeks. It could incorporate some of these suggestions and submit an updated draft to the government, which is expected to use part of these inputs in formulating a gold policy.

The idea behind a good delivery gold bar is to harness above ground gold held by individuals and temple trusts, refine these into standard quality gold bars, which could be used by banks to sell them to jewellers, etc. – Ram Sahgal

Proposed Gold Exchange to have its own good delivery norms

In a move that will set the stage for setting up a spot exchange for gold trading, help make gold trade transparent and eveolve an  India-based gold price, the government is considering formulating good delivery standards and responsible gold practices for trading in the precious metal.

So far, in most trading centres across the globe, London Bullion Market Association or LBMA delivery standards are accepted. Even on Indian futures exchanges, it is the LBMA standard gold that is regarded as good delivery to the extent that gold refined by Indian refinery, but not having LBMA recognition, is not acceptable on MCX.

In India, only MMTC-PAMPS refinery has been recognised by LBMA. The government is discussing this issue with stakeholders in the bullion industry, including Indian Bullion Jewellers Association (IBJA), World Gold Council (WGC), Ficci, hallmarking and refinery associations and Indian Gold Policy Centre under IIM-A among others. As per the discussions held so far, a rough road map has been proposed for gold spot exchange, which will be refined further.

Rajesh Khosla, MMTC-PAMPS said, “The good delivery draft has been modelled on international norms for precision and quality set by LBMA, on which there can be no compromise. The Indian elements in this draft deal with finance and production numbers that relate to the Indian environment. The quality standards proposed are global and there is no compromise on that.”

WGC is also preparing feasibility report for spot exchange for gold, which is likely to be out in a month or two. Under the draft norms, refineries will come under the ambit of the Indian good delivery standards proposed by IBJA, if they have four years of experience in refining metals, an annual refined production of 5 tonnes, and a tangible net worth of Rs 15 crore.

IBJA has also proposed specifications for good delivery bars, integrated responsible gold guidance proficiency testing and proactive monitoring and auditing procedures. Responsible norms include procedures to be followed for ensuring gold is not imported from conflict zones or areas where mining is either illegal or the revenue from mined gold is used for illegal or anti-social activities.

Said Surendra Mehta, secretary IBJA, which prepared good delivery norms for gold along with all stakeholders: “Indian good gold delivery rules and responsible gold standards are key to the establishment of a gold spot exchange.” IBJA put the draft on its website and has invited suggestions from stakeholders on the draft rules till August 14. Mehta added, “The rules for good delivery and responsible gold standards will also apply to silver.” Comments on this draft have also been invited from government, BIS, RBI and Sebi among others.

However, according to sources in the know, work for setting up a gold exchange is being executed on several front. Apart from IBJA’s proposed India good delivery norms and WGC feasibility report, a proposal is under discussion in the finance ministry on GST treatment.

According to the proposal relating to GST on gold traded on the proposed spot exchange, trading will not attract GST, only deliveries will. Vaults storing gold will be recognised by the exchange and delivery centres covering major trading and processing areas will also be identified. Deliveries will have gold swap options to facilitate intercity trade. So, if a trader in Chennai sells gold to a trader in Mumbai, then the seller’s account in Chennai will be debited, while delivery will be made from the vault situated in Mumbai.

Trading will be on a nationwide online platform. BSE and commodity exchanges are already deliberating this issue. BSE has also proposed to set up a gold spot exchange in partnership with IBJA.

Discussions held so far on the gold spot exchange have also included issues such as who should regulate the bourse, whether or not all imports should be compulsorily sold on the spot exchange. Some clarity will emerge after WGC comes out with its feasibility study. – Rajesh Bhayani

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