Mumbai: Gold smugglers have stepped out of 1970s’ Bollywood potboilers into present day reality with the government raising taxes to curb the import of the yellow metal.
According to data from the Directorate of Revenue Intelligence (DRI), an agency that monitors economic offences, the incidence of gold smuggling in the current fiscal year has zoomed at least eight times compared with the corresponding period the previous year.
As the government struggles to rein in a raging current account deficit that is likely to cross 4% of the national economic output this fiscal, it has increased the import duty on the precious metal thrice since last year.
India’s gold imports, next only to oil imports in terms of value, were responsible for a current account deficit of 4.2% of the gross domestic product in 2011-12, a 30-year high.
The increase in import duty on gold has clearly led to a price differential between Indian and international gold, and that, in turn, has led to an increase in smuggling. Spot gold prices here are as much as 5.7% higher than in Dubai, compared with a difference of 0.1% in 2008. Typically, gold is smuggled into India from Dubai.
In the first 10 months of 2012-13, till January, DRI has seized gold worth Rs.60.17 crore (200kg at the current price of gold) and cracked 36 cases of smuggling. In the corresponding period in 2011-12, it had seized gold worth Rs.7.42 crore and cracked 15 cases.
To be sure, the number is almost insignificant when compared with the value of India’s gold imports—$38 billion (around Rs.2.03 trillion today) till December.
And it refers only to seizures and the gold smuggled into India could be much more; DRI officials admit that they detect about one in every 10 cases.
“The duty rate hike in phases, from Rs.100 per 10g to 6% (about Rs.1,800 at the current price) now, has not really dampened the demand. In fact, raising of duty has only enhanced the profit margin of smugglers,” said a senior DRI official who did not want to be identified.
According to a Reserve Bank of India report on gold imports and gold loans, released in January, while the average gold price in 2012 was 2.4 times that of 2008 at Rs.29,302 per 10g, the demand was up by 1.6 times during the same period to 1,079 tonnes.
While the government’s actions are intended at discouraging import of physical gold, DRI and customs officials say the recent 2 percentage point increase in the import duty on the precious metal will make it difficult for enforcement agencies to contain bulk gold smuggling in India.
On 22 January, India raised the import duty on gold to 6% from 4%.
After restrictions were lifted on gold imports and a few commercial banks were allowed to import gold and sell the yellow metal to jewellers and exporters in 1997, the spread between international and local market prices shrank dramatically, but with the rise in import duty, it is now widening.
Explaining the modus operandi of gold smugglers, the DRI official said most of the smuggled gold is brought into India through air mostly from Dubai and Thailand, concealed in either cabin baggage or different parts of the body. People carrying this gold are called carriers, or mules, and they work in pairs. Going by the data collected by DRI, on average, each mule carries at least 5kg of gold per trip.
According to the DRI official, the return on investment for a smuggler in a year amounts to as much as 200% for such trips.
Here’s how the math works: At the current price, it costs Rs.1.44 crore to buy 5kg of gold in Dubai. The cost of an air ticket, hotel expenses and the commission of the mule plus hawala fees to send the money to Dubai after the gold is sold in India comes to another Rs.2 lakh. The same gold can be sold in Mumbai for Rs.1.51 crore, netting the smuggler Rs.5 lakh for a single trip.
Such an operation typically takes four days. Theoretically, this means a smuggler can churn his initial investment seven times a month. Over a year, that means a profit of Rs.4.2 crore on the original Rs.1.5 crore investment.
“As of now, gold smuggling is limited to air passengers and carriers, which has limitations in terms of volume and cost. The bulk smuggling channels (by sea and land) have not revived, but the recent increase in customs duty will provide the profit differential to revive it,” said a senior customs official who too did not want to be identified due to the sensitivity of the issue. This person added that it would be impossible for enforcement agencies to contain smuggling through these routes.
Customs officials also claim their job has been made tougher by a 2011 Supreme Court ruling under which individuals arrested for violating the Customs Act can be released on bail. The apex court’s decision, both officials mentioned above said, has taken away the powers of the customs department to deter smuggling.
Ravi Krishnan contributed to this story.