With surplus foreign exchange earnings by the precious metal and precious stones sector, the notion of depletion or pressure in forex reserves due to their imports is erroneous.
The general perception is that gold and diamond imports are guzzlers of precious foreign exchange. This impression is totally misplaced. If we analyse the import and export of these items over the last six years, a trend emerges that there is significant “value addition” when gold as jewellery is exported and rough diamonds are shipped out as cut and polished ones (data is collated from the Gem & Jewellery Export Promotion Council, or GJEPC, sponsored by the ministry of commerce). With respect to the composite sector (chart 1) consisting of import of gold bars, silver, rough diamonds, pearls, etc, there has been consistent value addition since 2012, rising to 34% in 2016 and 23% in 2017. Likewise, if the imports of gold bars are considered in isolation, there is a steep value addition since 2015, touching 81% and at 104% in 2016 (chart 2). In fact, $4.15 billion of gold bar imports of 2015 have yielded $8.55 billion in exports—it equals net exports of $4.37 billion.
With surplus foreign exchange earnings by the precious metal and precious stones sector, the notion of depletion or pressure in forex reserves due to their imports is erroneous. In fact, gold jewellery and polished diamond exports are more than FX-neutral. It could also mean that Indian households may be using a major portion of recycled gold, instead of relying on fresh imports. The value addition by gold jewellery, diamonds, pearls, precious stones, etc, is $26 billion over the last six years, or averaging $4 billion per annum of FX earnings. This is the result of skilled craftsmanship and efficient trading practices of import and exports, where price sensitivity is at its peak. We can compare it to average annual export of $4 billion of basmati rice that is highly water- and labour-intensive, including the use of fertilisers—which is also imported.
Any policy action to prune down or restrict imports of gold or rough diamonds will have parallel effect in pulling down exports. Indian exports of gold and diamonds are about 13% of national exports in 2017, or about $35 billion (chart 3). Therefore, there is a case for incentivising such imports for more exports. It is a suggestion worth considering by the policy-makers. At a time when Indian exports are sluggish, why not consider linking gold and diamond imports with overall exports. Trade and industry are looking for incentives to export. Conceptually, all exports may be rewarded with a freely tradeable scrip (called the “gold/diamond certificate of import”) of 10% of each Indian export in dollar denomination. With about $300 billion worth of India’s current exports, 10% scrips would be $30 billion. Since gold/diamond imports are worth $30-40 billion, such an entitlement will let earn the exporters market premium of some 5-7%, depending upon the import intensity of gold bars and rough diamonds. The customs duty on gold imports will then have to be made nil within one year of notifying this facility. Such a “gold/diamond certificate” could be issued to the exporter by a bank through which export documents have been negotiated and the payment realised. Those who are not able to import gold/diamonds by using such a scrip, they may pay 20% “penal” duty for clearing their consignment. This duty-free import scrip may be submitted to custom authorities at the time of clearing gold/diamond consignments.
This mechanism will be self-regulatory. When exports increase, value/availability of these scrips will also rise, but their premium will come down—facilitating less costly imports of gold and diamonds. Value addition in gold jewellery or polished diamond export is enough to absorb 5-7% premium, though re-export is available on zero duty. The proposal is not a new idea. It existed in 1997-98, when DGFT used to auction “special import licences” for gold import on the basis of maximum premium offered by bidders. Currently, there are nominated agencies, including prominent banks and select trading houses, who import gold. They too will have to acquire these import scrips from the market. Dollar denomination of the scrip is suggested to lock the value so that a stronger or a weaker rupee may not affect the intrinsic value of import.
Recently, there have been controversies under India’s FTAs with South Korea and Indonesia that provided duty-free imports—which perhaps led to some of imports of gold being diverted through these countries. If gold/diamond imports are made on the basis of this certificate and the duty is reduced to nil, such issues will automatically cease to exist. Right now, with 10% import duty and 3% GST, there is an arbitrage between prices abroad and in Indian market—this provokes unofficial and illegal channels of imports. The above suggested scrip will minimise that arbitrage and such activities. At a time when jobs and business opportunities are reportedly on the decline, this tradeable scrip will create a new market of traders, brokers, commission agents and importers that would be at least worth $1.5 billion in revenue. Gold/diamonds trade is supportive to the national economy, and globally too Indian skills and craftsmanship in jewellery and diamonds are well recognised. Based on the evidence of imports and exports of precious metals and precious stones, this trade deserves to be encouraged holistically.