A decision taken in the final days of the Manmohan Singh government may have led to the hoarding of gold and allowed traders to profiteer by artificially jacking up prices.
Fresh questions are now emerging over why the previous UPA government allowed 13 select firms to import gold and sell it in local markets at a premium, lifting prices of the market price of a metal widely cherished by Indians.
The decision was taken on May 21, five days after it was clear that the UPA had been buried in a Narendra Modi-led landslide, and five days before Modi’s team actually took office.
It allowed ‘star trading houses (STH)’ and ‘premier trading houses (PTH)’ to import gold and sell up to 80% of their total bullion shipment in local markets, a major change from existing rules that allowed such firms to import gold only under the condition that all of it would be exported after converting it to jewellery.
After the change took effect, during June-November 2014, India imported 588.1 tonnes of gold, more than double the amount imported in the previous six months.
And as much as 60% of June-November imports, or 352.86 tonnes, were shipped in by 13 STHs and PTHs that included companies ranging from rice exporters to stockbroking firms to large manufacturing conglomerates, top government sources told HT.
“During the same period 10 public sector banks had imported only about 28 tonnes or less than 5% of the total gold imports, clearly showing the trading houses, with limited bullion trading credentials, had even edged out commercial banks,” a government source, who did not wish to be identified, told HT.
Allowed to sell the bulk of their imported gold, the traders promptly stockpiled the metal and charged a premium of Rs 400 per 10g over the landed cost, or the cost of imports including duties.
When contacted by HT, former finance minister P Chidambaram suggested that government and Reserve Bank of India officials who had access to the files should be reached.
Stung by the surge in imports that peaked in November at 151.6 tonnes, on November 28, his successor Arun Jaitley piloted a move to scrap the 80:20 rule mandating traders allowing the local sale of up to 80% of bullion. It is likely that the government will revert to the earlier rule banning local sale, though no final decision has been taken.
The impact has been almost immediate.
Bullion dealers in Mumbai said premiums had collapsed to less than Rs 100 shortly after the government announced the decision to scrap the rule.
Gold imports in December and January (latest for which data is available) has plunged to 39 tonnes and 41.5 tonnes respectively.
Prices of the metal are currently ruling at Rs 26,410 per 10 g, a three-month low.
India had raised the import duty on gold to 10% and imposed the 80:20 import rule in August 2013 to stem dollar flight and contain the current account deficit that hit a record high of 4.8% of GDP.