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Return of Hawala, gold smuggling?

business Updated: Aug 19, 2013 12:12 IST
Gaurav Choudhury

Have you bought a property overseas last year and are paying a dollar-denominated loan? Have you also taken a loan for your daughter’s education in a US-business school with a $90,000-fee for two years? Or are you a trader who has been importing products and selling them in India for profit?

In the wake of the unexpected restrictions on the amount of dollars that Indians can carry overseas or spend abroad have raised the spectre of encouraging illegal routes such as ‘hawala' (see graphic).

"While the authorities aim to reduce foreign exchange volatility, we fear that they may end up sending a panic signal," said Sonal Varma, economist Nomura broking and research.

Already, government agencies have detected a marked rise in gold smuggling this year (see graphic) that can be directly correlated to import curbs on the yellow metal aimed at controlling the widening current account deficit (CAD) — the difference betwe­en dollar inflows and outflows.

India is the largest consumer of gold worldwide.

The government views the rising imports of the precious metal as one of the main reasons for a worrisome CAD, which hit a record 4.8% of GDP in 2012-13.

The Reserve Bank of India (RBI) last week slapped new foreign exchange controls restricting the amount of dollars that Indian companies and individuals can spend overseas. It also banned Indians from buying property in foreign countries and imposed fresh curbs on gold imports as part of a strategy to shore up the rupee.

Under new rules an individual can spend $75,000 (about R46 lakh) from the earlier $200,000 (about R1.22 crore) in any given year. Companies can now invest only up to 100% of their net worth in overseas locations - a fourth of the current level of 400%, which could affect companies' plans to acquire overseas assets.

The rupee hit an all-time low against the dollar on Friday, as shares fell by their steepest in nearly two years and the price of gold scaled a six-month high - just when Indians started stocking up for the wedding season.

The Reserve Bank has also banned the import of gold coins and medallions. Importers of gold will have to settle their bills upfront, with the added rider that at least 20% of imported gold would have to be re-exported.

"No doubt, a hike in duty in gold imports would curb demand for gold in the short run. From a long term perspective, it is counterproductive as it would encourage smuggling of the precious metal," CII director-general Chandrajit Banerjee said.