New Delhi: Finance Minister Nirmala Sitharaman announced cut in import duties on gold in Budget 2021. The duty on gold was 12.5 per cent until 1 February, which has now been reduced to 7.5 per cent. Additionally, the government will impose an Agriculture Infrastructure and Development Cess of 2.5 per cent.
In episode 677 of ‘Cut The Clutter’, ThePrint’s Editor-in-Chief Shekhar Gupta explains what the small cut in import duty tells us about the Indian political system’s fatal attraction for bad policy.
“Sitharaman has done it because duties on gold have become counterproductive, because duties on gold that Manmohan Singh and P.V. Narasimha Rao had finished for Dawood Ibrahim and his type, has come back. This happens when arbitrage is available,” Gupta said.
“In the past, gold was smuggled in large quantities as it funded all of India’s underworld and corruption — bureaucratic corruption, customs corruption, judicial corruption. It also funded a lot of terrorism because large values of gold can be packed in a small base,” Gupta said.
“Gold is a sink for black money. One way to clean up gold was to open its imports. Second was to reduce or withdraw all duties so that the margin was taken away. And third was to improve India’s foreign exchange rules so that people didn’t have to get into so much hawala,” Gupta added. The trade of hawala and smuggling of gold are linked.
Rise in import duty
The basis of the wealth of Chhota Rajan, Yusuf Patel, Dawood Ibrahim, Chhota Shakeel, Abu Salem was gold smuggling. “Dr Manmohan Singh finished gold smuggling but in a way also brought it back,” Gupta said.
In 2012-2013, when the UPA was in power, India’s current account deficit was rising. “Indians were importing too much gold because they didn’t have so much faith in the management of the economy. India’s inflation was going up,” Gupta said.
In 2012, India put an ad valorem customs duty of 2 per cent on gold imports. Until then, there was just a notional duty on gold of Rs 300 for 10 grams. This was done so that all gold imports can be documented. On 17 January 2012, the customs duty on gold was 2 per cent, which was increased to 4 per cent on 28 February. On 21 January 2013, the duty was increased to 6 per cent.
“So what has happened is that between 17 January 2012 to 21 January 2013, in 369 days, you have taken your excise duty on gold import from zero to 2 per cent to 4 per cent to 6 per cent,” Gupta said.
On 13 August 2013, when inflation was rising, the UPA government raised import duty from 6 per cent to 10 per cent. The NDA government, instead of rolling it back, further increased it to 12.5 per cent on 5 July 2019.
In financial year 2017, India’s gold imports were at 780 tonnes, in 2018 they increased to 955 tonnes, to 983 tonnes in 2019, and reduced to 720 tonnes in 2020.
“So what’s happened is once you’ve gone over 12 and a half percent, you’ve crossed that limit where smuggling becomes a lot more profitable than imports. Imports come down and smuggling goes up,” Gupta said.
Also read: Customs duty on gold cut to discourage smuggling, money laundering, says finance secretary
Gold seized
In India, the amount of seizure of smuggled gold has increased over the years. However, the amount seized is directly proportional to the amount smuggled.
“Seizure is not a way to reduce or stop smuggling. It may be a way of increasing the costs of smuggling. This is seen as friction in a well-running machine. For friction, what you need is grease and that grease is the bribe. That’s how bribing of customs officers, police officers and judges etc, starts ,” Gupta said.
Between 2016-17 to 2019-20, the Parliament was informed that gold smuggling to India has risen by 207 per cent. In 2010-11, India seized smuggled gold worth Rs 17 crore. In 2011-12, it went up to Rs 42 crore. In 2012-13, smuggled gold worth Rs 107 crore was seized because duty was imposed.
In 2016-17, gold worth Rs 858 crore was seized. It 2019-20, it went up by another 13%.
“Gold imports are coming down. In FY 2020, gold imports were at 720 kilos, while it was 983 kilos in the previous year. This is because the BJP government added another 2 and a half percent duty,” Gupta said.
“While trade deficit improves, a lot more of the ill-gotten money will get into hawala funding the purchase of gold coming from outside,” Gupta added.
Watch the full episode here:
