smuggling may become legal in india

New Indian Government Seen Easing Gold Import Rules But Not Right Away
(Kitco News) – Analysts look for gold-import restrictions in India to ease following the election of a new government, although later in the year.

Authorities may be somewhat cautious easing rules seen as onerous to the gold industry as they try to balance the repeal against making sure the current account deficit does not start widening again, market watchers said.

“There is the possibility that they scale back those import restrictions,” said Rohit Savant, senior commodity analyst with CPM Group. “But I don’t think that’s going to be one of the first things on their agenda. But it’s something that might happen maybe sometime in the second half (of the year).”

India historically was the world’s largest gold-consuming nation before China took the top spot in 2013 on a combination of its own strong demand and measures by Indian authorities to curb the amount of gold entering that country. The government took these steps in response to the current account.

Duties on gold imports rose several times last year; they currently stand at 10%. Other measures include an 80-20 rule that stipulates that a minimum of 20% of all gold imported must be exported before further imports can be made.

Officials with the ousted government previously suggested they would review the curbs on gold after seeing results of current-account deficit for the fiscal year that ended on March 31. The fourth-quarter deficit narrowed to $4.2 billion from $5.2 billion in the prior quarter. In particular, the market will watch for further developments after election results on Friday showed that Hindu nationalist Narendra Modi and his opposition Bharatiya Janata Party won a landslide victory over the long-dominant Congress Party.

Savant looks for any easing of restrictions to start with the so-called 80-20 rule, as this was considered the most controversial. He suspects that officials will be more hesitant removing import duties.

He pointed out that besides the gold-import duties, a soft economy and weak Indian rupee likely also helped lower the current-account deficit in recent quarters. But now with the rupee and economy picking up, these could mean there is potential for the current-account deficit to start widening again, since both could generally mean increased imports of various goods.

“They would, in my opinion, need to keep some of these gold restrictions in place to not let the current account deficit go out of control again,” Savant said.

Jeffrey Nichols, managing director of American Precious Metals Advisors and publisher of NicholsOnGold.com, also said that he doesn’t expect the gold import rules to be repealed right away; it could take until autumn before the new government removes restrictions that were put in place in 2013.

Nichols explained that despite a significant increase in gold smuggling in the country, there is still a large amount of pent-up demand. He added that gold prices could benefit as jewelers restock their depleted inventories.

“You might not see demand return to what it might have been but you maybe see a little bubble of sorts as inventories are replenished,” he said.

Howard Wen, analyst at HSBC, agreed that Modi’s election victory will be supportive for gold in the longer term. However, prices won’t automatically turn around in anticipation of changes to import restrictions.

“Import tariffs and the 80-20 rule won’t be rolled back right away. It’s expected be a slow process as it unfolds. There are more pressing concerns for gold in the near-term than India’s import tariffs,” he said.

Although it’s unclear what changes the government will make to the import restrictions, Wen said if they want to focus on economic growth, it will be an issue they will have to deal with sooner rather than later.

“The jewelry industry is really hurting right now,” he said. “In order for the economy to grow and the jewelers to be happy, the government will have to roll back these taxes.”