Curbing gold imports not only solution to tame widening CAD

August 14, 2014 Posted by admin

By James Jose, Secretary, Association of Gold Refineries Mints

India’s widening current account deficit (CAD) has been a long concern for policy-makers, economists and global investors. CAD, which is the excess of foreign exchange outflows over inflows, touched a historic high of 4.7 per cent of GDP in 2012-13, mainly due to rising imports of gold and petroleum products.

In a bid to trim the gaping CAD, the UPA government had hiked duties on gold import to 10 percent last year. In addition, a slew of measures were taken to reduce the demand for gold imports, by placing restrictions on the import of gold by banks and loans against gold coins by banks and non-banking financial companies.

The current government is inclined to continue with the steps taken by the UPA for controlling the widening CAD as they have worked. Minister of State for Finance Nirmala Sitharaman clarified recently that the government does not have any current proposal to cut the record 10 per cent import duty on gold.

However, while the short-term measures seem to have addressed the CAD problem, there is an urgent need for long-term sustainable measures to address the growing burden on CAD.

The new government must consider long-term measures to reduce the import of gold bullion and to encourage the development of world-class domestic refining and manufacturing facilities concurrent with setting higher compliance standards on all factors in the gold business.

Until recently there was no high quality gold bullion which was being refined in India due to lack of standardised gold refinery. Therefore whether for investment or manufacturing jewellery, the only recourse was to import foreign gold bullion bars to India.

Refineries in India operate mainly on imported gold dore bars and scrap gold collected from the domestic market. But the market for refining is limited in size with a few larger units and other smaller units mostly in the private sector besides a few government ones.

In addition, since most of the refineries are not LBMA (London Bullion Market Association)-certified, gold bars produced by them cannot be used for exchange traded funds (ETFs) or bought back by banks.

However, with the recent advent of an internationally-accredited world class refining facility, the trend will change. MMTC-PAMP India (a public private partnership) has become the country’s first refinery to receive an LBMA accreditation (for being a ‘Good Delivery’ gold refinery), which makes it competent to any other world-class refinery in other major developed economies as well.

We believe that the long-term solution to India’s CAD and gold imports is developing domestic refining and manufacturing facilities in the country.

This will reduce dependence on international suppliers since domestically refined world-class gold bullion would be available within the country and enable local jewelers to exchange their scrap jewelry against world-class gold bullion, thereby reducing direct gold bullion imports.

Furthermore, a world-class domestic refining industry is critical for the creation of higher value add industries in the precious metals sector, such as electronic components, dental alloys, catalytic convertors and semi-finished alloys for various other industries.

Besides, importing dore for refinery feedstock will result in substantial economic, technical and income tax revenue benefits for the country as a whole and also create job-opportunities.

Developing refining and manufacturing facilities in the country will hence go a long way in enhancing India’s reputation in the international community while addressing the CAD problem.

Article source: http://economictimes.indiatimes.com/news/emerging-businesses/regional-hubs/north/curbing-gold-imports-not-only-solution-to-tame-widening-cad/articleshow/40248672.cms

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