Gold Smuggling Takes Off in India

By
• BIMAN MUKHERJI
and
• ARPAN MUKHERJEE

Associated Press

A bride at her wedding in India. Gold is the traditional Indian gift for brides and helps keep demand high.

NEW DELHI?A fishing boat slid into the southern Indian coastal village of Kodikkarai late one evening in mid-June, carrying a cargo from Sri Lanka: a stack of gold bars weighing more than 40 pounds.

Four men jumped off the boat and headed for waiting Jeeps. Unfortunately for them, government sleuths were there, tax officials say, nabbing the men before they could sell the gold in the nearby city of Chennai, a trading hub for the precious metal.

The men were charged with smuggling in a case that reflects a sharp upswing in illegal gold imports being reported by officials in recent weeks. The upturn follows the government's latest effort in June to rein in a drastic slide in the rupee's value by implementing policies to discourage importing of the precious metal. The rupee has fallen more than 10% in the past couple of months to touch successive record lows, closing Thursday at 59.11 rupees to the U.S dollar.

India, the world's largest gold consumer, meets almost all of its demand via imports. And purchases from abroad require buyers here to sell the rupee to raise greenbacks. Curbing imports is meant to limit that downward pressure on the currency.

The country sharply increased the import tax on gold to 8% from 6% in June, the fourth such increase in the last year and a half. In December 2011, the import tax on gold was set as a flat rate that amounted to about 1%.

Last month, the government also made it harder for dealers to use bank credit to buy the precious metal from suppliers overseas. The nation's central bank restricted banks and trading agencies from importing gold on behalf of customers and taking payment later. The move effectively required dealers to pay cash in advance for imports.

Monday, the central bank changed tack, scrapping the ban on deferred payment but requiring banks and dealers that import the metal to ensure that 20% of imports are re-exported.

"Overall, this measure would mean that gold availability in open markets is going to reduce still further," said Santosh Srivastava, managing director of Gitanjali Jewellery Retail Ltd., which runs a chain of 135 retail shops across the country.

The measures are having an effect. Gold imports declined 11% to 859.7 tons in 2012 from 969 tons in 2011. And the total for June fell about 80% to 30 tons from 162 tons in May, according to a trade ministry official.

Bloomberg News

India, the world's largest consumer of gold, launched an effort in June to rein in a drastic slide in the rupee's value by implementing policies to discourage importing of the precious metal.

But while supply may be falling, demand isn't.

Gold is the preferred form of savings for farmers, Mr. Srivastava said. It is also the traditional gift for brides and purchased by millions of Indians during Hindu festivals, he added.

"We have always maintained that there is a very innate demand for gold in India," said P.R. Somasunderam, managing director of the World Gold Council's India office. "Trying to manage this demand, which is so diversified, by restricting supply will lead to undesirable consequences."

India's gold demand is likely to be at the top end of the council's forecast range of 865 to 965 tons, or 2.24 trillion rupees ($37.7 billion), this year, Mr. Somasunderam said, although Marcus Grubb, the council's managing director of investment, argued that the import curbs could cut into buying. Plentiful monsoon rains and an ample harvest are expected to drive up demand from farmers in the second half, during the height of the festival season, Mr. Somasunderam said.

Traders and tax officials say the import decline presents opportunities for smugglers. "Smuggling of gold seems to be increasing month on month," said a senior official in the Department of Revenue Intelligence, a part of the Finance Ministry that combats tax evasion. "It is mostly coming from Dubai but also from Bangkok and Singapore."

The official said some of the gold comes by sea, but it also is being smuggled across land borders with Bangladesh and Nepal.

The number of people arrested by the department for gold smuggling rose to 32 in the quarter that ended in June from four during the same period a year earlier, according to the Revenue Intelligence official.

The value of the gold seized during the quarter was 270 million rupees, more than 10 times the 25 million rupees of precious metal retrieved from smugglers during the same period in 2012, said the official.

The total number of cases of smuggled gold during the same period shot up to 205 from 21 a year earlier, said an official at the Antismuggling Department, part of the Central Board of Excise and Customs.

But this is only a fraction of the gold being smuggled into the country, Revenue Intelligence officials say. "I think we are able to detect only about 5% to 10% of the gold smuggling in the country," said a second Revenue Intelligence official.

A Finance Ministry spokesman said a meeting of top-level tax officials was recently held in New Delhi to review measures to prevent gold smuggling. "All have been asked to be extra vigilant at both ports and airports," he said. "Night patrolling of the seas is also being strengthened."

Officials at Revenue Intelligence say smugglers can be difficult to catch.

In June, a man was stopped at customs while carrying cardboard boxes containing household appliances, such as a television and a food blender. An excessive number of staples on the boxes aroused suspicion. On closer scrutiny, customs officers discovered that the staples were made of solid gold, weighing 755 grams in total, worth around two million rupees, the second Revenue Intelligence official said.

A couple and their 5-year-old child were stopped by customs this week at the southern Indian port of Mangalore. A search led to the discovery of over four pounds of gold coins and jewelry, valued at 5 million rupees, inside the woman's underwear.

Others continue to rely on time-tested methods: Gold carried inside hollowed-out shoes, false bottoms in luggage or stuffed inside their own bodies.

Dubai merchants expect increased demand for their wares. "I feel the trend [of smuggling gold] will definitely continue as prices are low," said Nimesh Shah, a Dubai-based gold dealer. "If someone wants to buy gold, they will buy it from here rather than pay tax in India."

Indian passengers are allowed to import up to two kilograms of gold into the country, so long as they pay the import tax. Smugglers are usually prosecuted and asked to pay fines of at least 25% of the value of the gold's value. Fines can be higher at the discretion of the authorities. Repeat offenders can be put behind bars for violating foreign-exchange laws.

?Francesca Freeman contributed to this article.

Write to Biman Mukherji at biman.mukherji@dowjones.com and Arpan Mukherjee at arpan.mukherjee@wsj.com

Source: http://online.wsj.com/article/SB10001424127887323971204578626420651144876.html?mod=asia_home

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