Column: More glitter than gold

Updated: May 29 2014, 09:57am hrs
In FY13, bullion imports climbed to $54 billion and CAD (current account deficit) to about 4.7% of GDP. To cap CAD within a tolerable limit in FY14, policy pundits attempted to trim imports of the precious metal by raising import duty to 10% from 2% and imposing 20% jewellery export obligation. Only 80% is permitted for domestic usage.

These measures restricted the CAD at $29 billion in FY14 (1.7% of GDP) but hiked premium on Indian prices by $120-150 dollars per troy ounce (or per 31 gram approximately) making shady transactions/illicit channels very lucrative.

Ascension of CAD in FY13 is attributable to multiple constraints and not bullion alone, e.g., lack of FDI and FII inflows, ban on iron ore exports, prohibition on wheat/rice exports till 2011, slowdown in other exports, etc. Briefly, dollar inflows declined.

Simultaneously, import of precious metals through nominated PSUs and banks intensified forex outflows. Former finance minister P Chidambaram was the first to advise official agencies to halt precious metal imports.

PSUs and Indian banks provide significant financial comfort to overseas sellers especially when import is undertaken on consignment basis. Normally, private trade should be importing directly without fronting PSUs and banks, by establishing letters of credits on sellers abroad. By routing trade via government agencies, private entities shift their risk profile from international contracts to domestic agreements which can be managed with relative ease in case of defaults due to laxity in enforcement and systemic flaws in Indian legal framework.

Bullion bloats turnover

MMTC/STC/PEC-authorised banks are governments nominated channels for import of precious metal. In FY13sales turnover vs bullion import (ratio) of these three trading para-statals was: MMTC, R28,600 crore vs R13, 675 crore (60%); STC, R18,700 crore vs R11,250 crore (60%); PEC,R11, 650 crore vs R1,275 crore. In FY12, MMTC imported about R 51,000 crore of precious metal vs a total business of R66,000 crore, about 77% of this companys trading volume.

Import is undertaken for private trade on back-to-back basis, agreements on consignment basis with some margin money (advance payment of 10-15% approx), which insulates the PSUs from price volatility and dollar/rupee fluctuations. PSU earnings are generally a meagre 0.1% or even less. Traders profits or losses depend upon speculative positions. Gold import gives PSUs and banks the benefit of bloated turnover albeit with near zero profitability. (However, PSUs earned 4%-5% in FY14 through the special quota allocation for import of gold by DGFT in November- December 2013.)

Thanks to the Modi wave, RBI restored imports through select trading houses and jewellery manufacturers on May 21, 2014. The import/export ratio of 80:20 still remains. Even this irritant may be lifted soon. With likely re-liberalisation in the near future and higher GDP growth, these three organisations are likely to push imports to R65,000-75,000 crore or more in FY15 from R25,000 crore in FY14, at nominal service charge of maximum 0.1% versus an operating cost of 0.5%-1%. This also amounts to subsidisation for bullion traders. The same may be the case for banks as well for service charges.

High risk and losses

In the event of loss-making situations, bullion traders deftly breach back-to-back agreements. MMTC has transparently recorded transactional loss of R244 crores on bullion trade in their FY13 balance sheet, that wiped out profits of last three years import of R1,14,000 crores (2010-13) and pushed it into a net loss of R70 crore last year. There could be many cases in other PSUs and nominated banks of under-recoveries/losses or litigation pending final conclusion which may be unreported. The government has to review whether such an enormous value of exposure, with inbuilt risk, is borne by PSUs and banks for the privates at almost next to nothing return or to build some additional safeguards.

Primary areas neglected

PSUs neglect of primary areas of trade stands fully exposed, reflecting lack of international trading activities in commodities except precious metals. The new government will do well to lay stress on their primary mandate. Principle of cost-benefit-risk- reward may be weighed viz-a viz commodity trading and bullion imports, and applied accordingly. Ideally the performance of these PSUs should be evaluated on non- bullion business.

For ensuring quality of metal imports by privates, all the government has to do is to stipulate that bars should be of London Bullion Market Association (LBMA) Good Delivery List which represents de facto standard for the quality. Let business deal with business and not the Government. Recallminimum government, maximum governance.

Tejinder Narang

The author is a trade analyst