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Surprise! They’re Smuggling Gold!

I’ve been saying this for a long time. That if you try to stop gold supply from outside, they’ll smuggle it in. The smugglers are now winning the gold war. India, in an attempt to stop a large current account deficit, has dramatically increased the import duty of gold to 10%, jewellery to 15% and announced a total ban on gold coin imports.

This has helped the current account deficit by bringing down gold imports from over $16 billion in Q1 to just $3.8 billion in Q2. This has accounted for most of the fall in the current account deficit from $21.7 billion to $5.1 billion.

But this is obviously short lived. Gold is not a commodity we use too much; it is a store of wealth. It’s durable. It’s very dense – so you can put a kg in the palm of your hand. India is nuts about gold primarily because of the insane amounts of money printing and inflation this country has seen. And all of this leads it to be extremely useful for smuggling if official imports are restricted. As I’ve been writing, what will happen is some joker will use false invoicing in a different name (such as a software company) to pay a fictitious organization abroad, and then smuggle the gold in anyhow, because there is a lot of demand.

Reuters now confirms that Gold smuggling is even more prevalent than narcotics.

"Gold and narcotics operate as two different syndicates but gold smuggling has become more profitable and fashionable," said Kiran Kumar Karlapu, an official at Mumbai’s Air Intelligence Unit.

"There has been a several-fold increase in gold smuggling this year after restrictions from the government, which has left narcotics behind."

From travellers laden head-to-toe in jewellery to passengers who conceal carbon-wrapped gold pieces in their bodies – in the mistaken belief that metal detectors will not be set off – Indians are smuggling in more bullion than ever, government officials say, driven by the country’s insatiable demand for the metal.

As authorities recognize this, they tighten up the easy routes – of carrying jewellery or gold bars on your body, of putting gold coins in your pockets, etc. Even here, the probability of getting caught is probably less than 5%.

When the easy routes are tightened, the smuggling goes higher tech and higher cost. There will be ship based smuggling routes, like in the days of Haji Mastan who eventually built a massive empire through gold smuggling when imports were mostly banned. What”s wrong with Haji Mastan, you might ask – just that he bred a lieutenant named Dawood Ibrahim who is now a terrorist who planned bomb blasts in various parts of India. If you ignore one sort of crime (smuggling) it breeds an even worse form of criminal. And it gets increasingly difficult to capture criminals as they invest more, and your officials can get compromised as well.

We will do well to remove our restrictions on gold imports and let people do what they should. And if we really don’t like the spectre of gold, the RBI has some 400 tons of it much of which is lodged outside India; they should get that gold back in, do a “gold swap” with bankers, the same way they did oil swaps with Oil marketing companies. Banks get access to gold that they give to jewellers, and that gold could then be returned after a year (or its dollar equivalent); it won’t sustain for too long, but at least in that time our exports will become competitive as the rupee has weakened substantially.

We should push temples to sell all their excess gold anyhow, such swaps may be a good way to facilitate that (Temples do a gold swap with RBI, which pushes it out to banks). There are few takers for this theory but I believe a strong government can push it through.

Smuggling is up, folks. That “easing” of the current account deficit? It won’t last long.

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