Home >Market >Stock-market-news >High hawala premiums point to increase in gold smuggling

Mumbai: The premium on dollars in the hawala market, an informal and illegal money transfer service, remains high because of increased demand for dollars from those looking to smuggle gold into India from markets in Africa and South America, according to law enforcement officials and others familiar with the matter.

The premium, usually around 50 paise per dollar, shot up to 3.50 in mid-March, but has since eased to 2 after tax authorities started seizing cash over 1 lakh, as instructed by the Election Commissioner under the model election code of conduct.

The premium may rise after the elections, said a senior official at the enforcement directorate, the agency that investigates foreign exchange violations.

“The hawala premium has come down from 3.50 to 2 because of the crackdown ahead of the elections. For instance, the income tax department has set up a 24x7 hotline to receive complaints on large cash transactions. Because all the (enforcement) agencies are highly active right now, everyone is lying low," added this person who asked not to be identified.

Elections to the 16th Lok Sabha, which started on Monday, will end on 12 May.

Gold smuggling has risen after the government raised the import duty on gold in phases, to 10% in August 2013 from 1% in January 2012. In addition, the Reserve Bank of India (RBI) imposed a form of quantitative restriction on gold imports by saying that a gold importer must export at least 20% of the gold imported. This is known as the 80:20 scheme.

The restrictions have led to a considerable fall in gold imports. In the three months ended 31 December, gold imports into India fell to $3.1 billion, from $17.8 billion a year earlier, according to government data. In volume terms, gold imports in 2013-14 are estimated to have fallen to 620 tonnes, according to a 4 April Bloomberg report that quoted unnamed government officials. In 2012-13, India imported 845 tonnes of gold.

Meanwhile, there have been enough indications of an increase in gold smuggling.

According to the data on seizures of gold made by the Central Board of Excise and Customs, the total value of gold seized in the nine months to 31 December rose 376.5 % over the corresponding period a year ago, to 245.6 crore.

According to a directorate of revenue intelligence official, the customs department manages to seize the gold involved in only one in every 10 instances of smuggling.

A report by the World Gold Council dated 18 February estimates that 150-200 tonnes of gold were smuggled into the country in 2013.

Haresh Soni, chairman of All India Gems and Jewellery Trade Federation, claimed that more gold has been smuggled into India in the past four months than in the 10 years before that.

The hawala route is used to finance this smuggling.

According to law enforcement officials, diamond traders are actively involved in this.

Here’s how the process works: a diamond merchant sells diamonds to his subsidiary in Antwerp or Dubai, for say, $100. The overseas subsidiaries then sell the diamonds in the European market for $300-400. The profit of $200-300 is not repatriated directly to India as this will attract tax.

A smuggler who wants to buy gold overseas approaches the diamond merchant in Mumbai. The merchant is paid in rupees and asks his overseas subsidiary to make the payment wherever the gold buyer wants it to be made, typically somewhere in Africa or South America.

Several currency consultants and market participants confirmed the modus operandi. Like the law enforcement officials, none wished to be identified.

RBI clamped down on gold imports in July last year. The rupee hit its all-time low of 68.85 a dollar on 28 August, but has since strengthened.

The domestic currency closed at 60.13 to the dollar on Monday.

RBI governor Raghuram Rajan admits that instances of gold smuggling have increased and that the hawala route is being used.

“Overall smuggling is relatively small at present. That is not to say that it cannot go up. It takes a little bit of time to put the networks together. Small amount of smuggling is happening. So hopefully if we create some uncertainty about how long the measures (to curb gold imports) will last, it will prevent significant organization (of such smuggling) from taking place," The Hindu Business Line quoted Rajan as saying on 29 October.

He added in the interview that hawala transactions would fund such smuggling.

“It is not going to be formal financing; it is going to be through the informal financing route."

RBI could consider relaxing the 80:20 scheme, Rajan said in a 2 April interview.

Soni said his federation had asked the government to bring down the import duty on gold to 2-4% from the present level. This will help kill smuggling and anyway, the current account deficit has been bridged to 0.9% of gross domestic product, he said.

Gold imports of 845 tonnes contributed about 80% of the record $87.8 billion deficit in fiscal 2012-13.

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