The Economics of Gold Smuggling - The Indian Context




India has traditionally been a nation of marine trade. It had bold seafarers, who took enormous risks on its 5,000 mile coastline. A steady flow of gold and silver into India has been a recurrent aspect of Indian history. Gold thus came to our shores along trading channels, particularly in southern India's rich port cities. While the gold that came into the country through this method was almost certainly legal as per the authorities established at the time, the gold that will form the basis of this article is not.


Every year India imports between 800 and 900 tonnes of gold. Imports in 2019-20 valued $28.2 billion and are 14.23% below that imported in 2018-19 for $32.91 billion. Gold consumption in India in 2020 was projected to be around 700-800 tonnes, in comparison to 690.4 tonnes a year prior to that, by the World Gold Council (WGC), which follows wholesale trade in gold. The estimated consumption per 10 years is 843 tonnes. Several authorities have estimated that more than 200–250 tonnes, or over 1/4 of the gold used, is trafficked annually to India, the largest manufacturing hub in the world. The country comes second after China in the list of the world's biggest consumers of gold.


How India Became one of the Largest World Gold Smuggling Hubs

In its 2019 report called "How India Became one of the Largest World Gold Smuggling Hubs," IMPACT - a Canadian NGO, states that illegal exports to the United Arab Emirates (UAE), from the Great Lakes area in Africa, from where most of the gold was smuggled into India, grew from about five tonnes a year in 2007 to more than 22 tonnes a year by 2012. The unlawful commerce of gold is worth over $1 billion and government tax income lost at least $20 million. Gold is often promoted for money washing and illicit commerce as an alternative to paper currency by criminals. This is a valuable mineral, easy to carry, prone to contraband and an excellent target for armed organisations.


“Needless to say, the increase in the incidence of duty on imported gold has incentivized the smuggling of the yellow metal”

Smuggling in India Report (2019-2020),

Directorate of Revenue Intelligence (India)


But before we dig deeper into the know-how of this aspect, let's first understand the conditions from where it all started.


The 1990's economic reforms repealed the 1960s Gold Control Act, which prohibited imports of gold other than jewellery. The law led to the creation in the 1960s, 1970, and 1980s of a famous network of gold traffickers. Reforms have resulted in a cap of ₹ 450 per 10 grammes of the metal duty which almost stops gold smuggling.


In 2013 the rates began to increase when the government changed from a fixed to a value-added rate, and in two months the gold duty increased four-fold to 4%. The imports of gold are now attracting customs duties of 12.5% (raised from 10% last year), 3% for GST and 5% for gold ornamental products. Many argue that a higher rate of taxes incentivizes metal smuggling against the background of the gold pull among Indians. There are estimates that every kilogramme of smuggled gold has a profit of ₹ 6 lakh over that which is imported via legal routes.


Unlawful trading becomes all the better at the price of the ₹ 50000 gold crossing for 10 grammes IMPACT assesses the private possessions stored in people's homes and offered in temples of India of about twenty thousand tonnes of gold. This volume exceeds the weight of the US central banks, Eurozone and China's gold reserves. Only every day does the volume increase. Most of the gold comes to India via the UAE, accounting for 75% of all entries. On the other hand, the UAE is the preferred destination for gold from the Great Lakes region of Africa, says the report by IMPACT.


According to the World Gold Council, the seizure rate of illegal gold is about 2 % (WGC). The country’s porous frontiers are in other cases helping smugglers with Nepal, Bangladesh, Bhutan and Myanmar.


How do they do it (allegedly, of course)

Air passengers from the United Arab Emirates, which is one of the world's biggest gold hubs, are among the most used ways in which gold is brought into the country. Typically smugglers engage Middle Eastern ‘tourists’ coming to India in various ways to take the smuggling home stashed. Duty authorities often say that they find the swag packed in capsules inserted into the rectum of a passenger. However, they also find gold in the stitching of suitcases and applied to underwear and feet, hidden beneath sophisticated perks.


In one case last year, a diplomatic courier pack was hit with 30 kilogrammes of gold worth more than $2 million. Many Indian workers in the Middle East come from Kerala, which has helped the airports there to become places to traffic, with seizures occurring almost every day, according to the officials. Last year customs officials said that in the state alone they had records of 540 kilogrammes of gold—more than double that of the previous year and about a fifth of the country's total.


Customs officials also say that a considerable amount of illegal gold is smuggled over the eastern border of the country and Bangladesh by land. Much of the gold imported is used for home use. In India, a large jewellery industry is based, with the use of gold for celebrations of births and weddings as well as for a safe way of storing wealth during times of financial instability for long periods of cultural and economic importance. However, about 20% of the Indian jewellery is exported and sold worldwide, including in the USA, says Impact. The organisation says it is almost certain that part of it comes from conflict zones, especially in Africa, due to the amount of gold being smuggled into India.


“This puts India not only at the heart of the world’s gold manufacturing sector, but also at the heart of an illicit supply chain with tentacles that extend around the globe”

How India Became one of the Largest

World Gold Smuggling Hubs, IMPACT (Canada)


How does this affect India's economy and why can’t the authorities stop it ?

Gold smuggling into the country has been estimated by the 'Indian Gold Policy Center' at 300 tonnes, resulting in a revenue loss of ₹ 20,000 crore as high duty imports led to an increase in non-official gold trading. The flourishing unofficial gold trade has clouded government efforts to organise the trade-in bullion and jewellery, says the IGPC, an Excellence Centre, sponsored by the World Gold Council at IIM -Ahmedabad.


In 2016, smuggled gold also represented more than a third of demand and cost the government more than 1 billion dollars in lost revenues. In 2018, the increase in unofficial gold imports affected Telangana and Andhra Pradesh's revenues, leading to a loss of up to ₹ 10,000 pounds as a result of GST. Conservatively, every state in Telugu fails to pay ₹ 500-800 crore as a 3% GST on gold and to charge the yellow metal sold on the grey market, avoiding tax.


The investigative limitations in the Middle East are one of the great obstacles for Indian Customs authorities. The agencies have issued circular surveillance on several occasions against main smuggling players. But even if they live, many suspects reach Kerala by road after landing at Kathmandu airport after crossing the border between India and Nepal. Lacking immigration and border control at the frontier crossing make this a safer entry point for these players than strictly controlled airports in Kerala. Sources said that they can reach Kerala by train and/or road after entering India from Nepal without being noticed by legal agencies.


The Way Forward

Gold smuggling as a business hurts the economy immensely. In 2018, official imports decreased by nearly 50% while volumes of gold smuggled increased. Political action to stimulate honest businesses, particularly when they fulfil all the requirements to integrate into formal markets, is urgently necessary. This will help in reducing illicit activity greatly. Loosening up the rules and regulations surrounding the import legislations will also help the authorities to function a lot more smoothly and will help them operate the process of investigation and arrest a lot more easily. The covid situation is not being kind to the economy as it is and an added problem of increase in gold smuggling due to the newly introduced and changed duty on imports has proven to be a big blow to it as a whole. The government and industry have a key role to play in creating an ecosystem based on trust that can enable the Indian gold industry to fully realise its potential.




References


Further Reading


Written by Shubhi Pandey (shubhi221199@gmail.com)

Edited by Mehak Vohra