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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.

  • Srinath says:

    The Government by these lopsided policies are only increasing the attractiveness of Gold. They should stop making savings deposits unattractive to the lay investor. TDS on interest payable on any savings deposit should be removed. The common man has poor knowledge on investments in stock markets, mutual funds etc. He is only confident to either invest in Gold, real estate or bank deposits. No wonder a significant portion of an individual’s investment is towards precious metals.

  • Leo says:

    onei is crazy if u think temple gold will be sold into the market…OK next silver demand is going to go thru the roof.what are you going to do next?

  • Ravi Shankar says:

    Very well articulated. In my view the government as an agency cannot be trusted. It has the biggest agency problem as the agents (government officials/minsters) will always short change the principal (common man) and steal their wealth. It has happened for ages, it will happen for ages. If RBI stops printing currency like crazy junkies and provide positive real rates of return to savers, those who invest in gold will be punished by falling prices. But for that, I need to just go back to sleep and dream (never going to happen). So the gold run is going to continue.

    • XYZ says:

      I don’t think any Indian really trusts another Indian except for their parents. I realized that when I permanently returned to India after staying for many years. There is a trust-deficiency and most Indians have no problem with cheating their fellowmen at the drop of a hat. It’s also petty form of cheating. So it becomes a vicious circle.
      I also now understand why Indians are crazy about gold. It’s the safest investment in a country where your assets can be stolen from you. Even land is not that safe because you cannot hide it.
      PS: I am not saying that the West is better. There are cheats there but the cheating is mostly limited to the elite and the middle and working classes are generally honest. It might have to do with living in rich societies where people feel safe anyway.

      • I’m not sure such painting with broad brushes and using arguments like “Indians are like this” makes any sort of sense. There is a lot of good in India, and a tremendous amount of honesty, particularly in the lower income classes. But yes, the punishment for theft is generally not that high, so there is a lot of cheating as well.

  • Anon says:

    We first demand all churches & wakf board to surrender their hoarded unused land so that real estate can crash 🙂

    • Let’s demand both! In fact anyone who has hoarded unused land should be asked to pay heavy taxes on it, so they’ll either sell it or build on it.

      • sandeep says:

        Why is land not considered as a natural resource (as it is not limitless) and owned by the Nation? It should be treated just like Coal, Oil, Telecom Airwaves… You bid and then buy. But then, it will be owned by bigger Thief, the GOVT..

        • Nope, land is property that should be owned and transferable. Govt anyway has eminent domain to dislodge you! 🙂
          I don’t particularly think Coal and Oil should be government property either. Temples are a different funda – they should be taxed on their income donations and pay in gold instead.

        • XYZ says:

          Temples, churches, mosques, stupas, gurudwaras etc could be made to pay taxes on their revenue but that doesn’t give the government the right to loot the wealth that was acquired before independence. If you support taxing places of worship for their wealth then logically you must support wealth tax for all entities – individuals and private corporations so that they pay a percentage of their total assets (or equity) as tax.
          Btw, religious places have a tax exemption in the US. Religious is central to our society, whether we believe or not.

        • Wealth tax: All of us already do, no? There is a wealth tax beyond some 50 cr. level or such which applies to everyone. And even if you taxed only income, in a couple of years you’d have enough taxes that will more than make up for things.
          I don’t particularly give a damn about the US or other countries – India needs to choose its own path. Religion may be central to our society, but so are food serving restaurants, and they pay tax.

        • Kaka says:

          Hell, I’m going to label my house and office as places of worship and all activities there should be tax exempt. Maybe found a religion while I’m at it with capitalistic activities being the rituals in it (so that they are tax exempt) – just need to concoct a book about how the world was created. Pretty damn easy, I’d think. Any financial planner can advise me on how to go about registering a new religion? :p Maybe I should check with those scientology guys.

        • Hilarious! I like the idea here. My religion is profit 🙂

  • bhupesh says:

    All non agriculture (converted) land should be taxed for the sqft which could be constructed on that land.
    One Acre land (~40000/ sqft)
    ~ 1 Lakh sqft construction (2.5x 40k)
    ~ tax on city out skirt @ 4 Rs /sqft ~ 4 lakh per year.
    ~ (Govt can give rebate of 5k per grown trees)
    ~ 40 fully grown tree, 6+ year age = 2 Lakh
    ~ pay 2 Lakh in tax)
    But as politician earn money from real estate and many bottlenecks are put artificially ( delay in approval, hording etc) also as it is state subject, not easy to reform in this area.

  • vamsy says:

    “push temples to sell all their excess gold…”
    or even better:
    * Sell Taj Mahal
    * Sell Parliament house
    * Sell all the national treasures and monuments (they are all anyway old and we would also be saving maintenance costs!)
    * Sell Indian citizenships (though I doubt how many takers would be there)
    * Rent our Armed Forces to any country who would pay
    As outrageous as the above are, I find your statement in the same intensity. First of all the gold does not belong to the government to sell. The current financial crisis is the handiwork of the ill conceived policies and too much short term thinking. Everyone knows how much the politicians have stashed in Swiss but no one has any interest to bring it back. We cannot force the temples to sell real money(gold) for printed pieces of radioactive waste (currency – the longer you hold the deeper will be the burn!).
    I hope Deepak, please do not bring this topic again.

    • Anshuk Jain says:

      and there it goes.. straw man..

    • I’m quite passionate about it 🙂 I believe we already rent out our armed forces. Gold is not like the Taj Mahal or Parliament house or whatever, it’s not a “monument of historical importance”. But yes, I agree the gold is not the governments, but the government does have a right to tax temples, and it should tax them 30% of the gold received, payable in gold. Similarly for wakfs and churches and all that.

  • Krish says:

    I too believe that this RBI move of imposting steep customs duty on official import of gold has led to increased smuggling. This has resulting into two bad effects. 1. Fuelling black money 2. Gold savings finding alternatives in terms of consumer mobiles and electronics.
    With no records to show, smuggled gold transactions at every point would go under the carpet and getting it unauthorised and cash dealings. Corrupt and mafias have found one more channel to store their ill gotten wealth. All the honest gold businesses and gold loan NBFCs and banks lending against this gold portfolio are suffering as customers are realising that overheads are becoming too high. For NRIs, visiting home country is a nightmare now. After all, expectations are high at family front for visiting NRIs and it is common to bring Gold and TV to satisfy the family needs by NRIs.
    With customs duty high and price of gold going no where, ordinary citizens are diverting their savings to buy expensive mobiles and other electronics. Much of the mobiles and electronics are imported and our purchases made in INR is again going FOREX to headquarters of Apple, Samsung, LG and so on. Again the very purpose of customs on gold to curb the INR depreciation is defeated.
    Our policy makers are quick to impose steps but debate a lot and discuss too long to roll back anything. Sooner they get back to old customs duty, it is good for the country, NRIs and gold businesses and finance institutions.

  • “That “easing” of the current account deficit? It won’t last long.”
    The easing will last because the smuggling does not show up in official figures. That is all the government is interested in I suspect. Yes the money still goes out of the country and the gold comes in, but it won’t show up in the official figures. It is all a game.
    It is the wrong game for the reasons you say, but I can’t see the government changing.

  • Rama Karupaiah says:

    Looked at your discussion and these are my views:
    1. gold smuggling is a given once you impose usurious duties; and the govt. is culpable. you are right about the criminals this creates and the problems arising from this.
    2. however why do you want to restrict gold imports? why should alternate sources of local gold be tapped? CAD is not because of gold; why did the govt. allow corporates to invest abroad when there has been little to no return flowing in from those investments. And to make things worse the govt. has allowed the ecb route (which has added to the external debt burden) and most investments are made on questionable bases. eg.investment in retail and then the govt. asks for fdi in retail!!
    3. what about unbridled imports of all things which should have been manufactured locally. First the govt. kills off local industry and then allows huge imports from China! And then blaming the poor state of CA on gold.
    Obviously the govt. thinks the public are fools. And as for land – the reason for high prices are:
    1. opaque govt. policies
    2. large amounts of black money in land transactions
    3. stupid development rules eg. fsi which is archaic; no proper urban planning etc.
    I could go on but I get angrier as I write! I can only say the middle class has been taken for a right royal ride.

  • XYZ says:

    In Kerala, there is a daily stream of news of people being arrested for suspected smuggling of gold. These are travellers (including airline personnel) between Gulf and Kerala. It has also come out that many of the major gold chain-stores have been associated with these smugglers for a long time. There has been an enormous explosion of gold retail in Kerala over the last few years.

  • David I says:

    The vast majority of gold smuggling happens in the garb of gold EOU imports. Even though EOUs are only allowed duty-free imports so that they can add value to the imported gold and re-export it in its entirety, many of these EOUs sell the imported gold domestically and make a killing. The government, to its credit, has taken some steps to curb a number of related malpractices like circular trading, but rogue EOU operators are still making a killing.