Dear FM, CAD is falling, but what about $10 bn worth smuggled gold?

India officially imported around 655 tonnes of the yellow metal during the first 11 months of 2013. The demand for gold was at 975 tonnes. So how is the difference between supply and demand being met?

Vivek Kaul March 06, 2014 14:53:51 IST
Dear FM, CAD is falling, but what about $10 bn worth smuggled gold?

You can't go wrong if you start off as a cynic - Hanif Kureshi in The Last Word

Like your relatives, you can't choose your followers on Twitter. And so, you get all kinds.

Yesterday, a Congress troll, who follows me, tweeted to me "u concede defeat on CAD?". This particular gentleman has been having a heated debate with me on the current account deficit (CAD) for a while now. He thinks that is the only economic worth looking at, given that he never has anything else to say on any other economic number.

Sometime last year he asked me what was my forecast for the CAD for the year 2013-2014 (the period between April 2013 and March 2014)? Those were the days when things on the rupee-dollar front were going all wrong. And in the heat of the moment I suggested a very large number.

Dear FM CAD is falling but what about 10 bn worth smuggled gold

The trade ministry said it had recommended easing curbs on gold imports, prompted by the brighter trade picture.

In technical terms, the current account deficit is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances. Or to put it in simpler terms, it is the difference between outflow (through imports) and inflow (through exports and foreign remittances) of foreign exchange.

The actual CAD number as it stands now is considerably lower than I had predicted at that point of time. Of course, at that point of time I had no idea that the government and the Reserve Bank of India would clamp down on the import of gold as hard as they did. As John Maynard Keynes, the most celebrated economist of the twentieth century once said "When my information changes, I alter my conclusions. What do you do, sir?"

Data from by the Reserve Bank of India (RBI) shows that the current account deficit for the October to December 2013, narrowed sharply to $4.2 billion or 0.9% of the GDP.

In comparison, the CAD during the same period of 2012 had stood at $31.9 billion or 6.5% of the GDP. The CAD during the period July to September 2013 had stood at $5.2 billion or 1.2% of the GDP.

The fall in the CAD has particularly been on account of two reasons. The merchandise exports increased by 7.5% to $79.8 billion during October to December 2013, in comparison to the same period during 2012. As the RBI release points out this was "on the back of significant growth especially in the exports of engineering goods, readymade garments, iron ore, marine products and chemicals."

The second and the major reason for the falling CAD was the government and the RBI clamping down on gold imports by increasing the import duty to 10% from 2%, over a period of time. Gold imports during October to December 2013, fell to $3.1 billion from $17.8 billion during the same period last year. Overall imports, also declined to $112.9 billion from $132.5 billion during the same period in 2012.

Hence, imports during the period October to December 2013, fell by close to $19.6 billion($132.5 billion minus $112.9 billion) and not all of it is on account of falling gold imports. What this tells us is that imports on the whole have slowed down due to a slowdown in economic growth leading to a dampening in consumer demand. As the recent IMF country report on India points out "In addition, non-oil, non-gold imports have declined in line with weak domestic demand."

In fact, the IMF report projects that non oil non gold imports for 2013-2014 will come in at $321.3 billion. This is significantly lower than $333.8 billion in 2012-2013 and $344.6 billion in 2011-2012.

So, yes, the falling current account deficit is good news, but not all of it is good news. The falling CAD also shows sign of the overall Indian economy being in trouble.

In fact, a clamp down on the import of gold has led to huge smuggling in gold. As Somasundaram PR, the World Gold Council's managing director for India recently told Reuters, "Despite all the curbs, demand has come in at 975 tonnes. The question obviously is where the supplies came from...We have seen anecdotal evidence of smuggling. Our estimate is 150-200 tonnes, more towards the upper end."

India officially imported around 655 tonnes of the yellow metal during the first 11 months of 2013. The demand for gold was at 975 tonnes. So how is the difference between supply and demand being met? Some part of the difference between supply and demand is being met through scrap gold. But the entire difference between supply and demand cannot be met through scrap gold.

This is where smuggling comes in. Now 200 tonnes of gold is not small change by any stretch of imagination. The average price of gold during 2013 was $1531 per ounce (one ounce equals 31.1 grams).

If we assume a gold price of $1300 per ounce that would mean around $8.4 billion worth of gold has been smuggled in. At a price of $1531 per ounce around $9.9 billion worth of gold has been smuggled in. Of course, this has huge social consequences, which no one is talking about.

A lot of this gold is being smuggled in through Bangladesh, Pakistan, Nepal and Sri Lanka. In these countries the import duty on gold has been less than the 10% duty in India, ensuring that there is money to be made first importing gold and then smuggling it into India. The Indian Express reports that Sri Lanka recently imposed a 10% import duty on gold. Pakistan recently temporarily banned the import of the yellow metal for a period of 30 days. The country had done so even in last August.

This can't be good news for India and has the chances of making our neighbouring countries even more hostile towards us. All in all, yes the CAD is falling, but it has led to repercussions which no one seems to be talking about. Not even my Twitter follower.

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