By Mr. Dhirendra
Kumar,Value Research
Gold is in the news again, and how!
Of all the people who could have publicly called for
easing of gold imports, Ms. Sonia Gandhi, or as some news reports say, the
National Advisory Council (NAC) that she heads, must be the least likely.
Equally unlikely is the news-although one can hardly
believe itthat the finance minister rejected Gandhis request. Of course, Im no
expert on Delhis byzantine politics. So, I have no idea what happens next, but
I guess neither NAC members nor Gandhi are likely to sit on dharna outside Rail
Bhawan to press for their demands.
However, the fact remains that the restrictions &
duties on gold imports have created a number of distortions. One curious
effectwhich Id mentioned in this column a couple of months agois the disconnect
between the NAVs of gold funds &
gold ETFs and the market prices of gold ETFs.
As Id written at the time, it is a strange by-product of
the upheaval in gold import duty and rules, in combination with the way gold
funds are run and valued. It so happens that ever since the government raised
the customs duty on gold and constricted its supply, gold ETFs have started
trading on the markets at a significant premium to their NAV.
Depending on supply and demand, theres always a little
difference between the market price and the underlying NAV of any ETF. However,
since August, as the government has started squeezing gold imports, there was a
steadily increasing premium which eventually reached nearly 10 % for all gold
ETFs. Of course, distortions for investors in gold funds are only one aspect of
the gold problem.
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| Dhirendra Kumar |
According to reports, the NAC / Sonia Gandhi letter was
specifically about the 80/20 rule that was brought in last year. Under this
rule, gold importers must export 80 % of the value of what they import. The
real problem seems to be that gold curbs are the effect of the rise in
smuggling. It has created a situation whereby those who are in any gold-related
business are at a commercial disadvantage if they operate with legally imported
gold.
Those who are willing and capable of dealing with smuggled
gold can compete unfairly with those who cant.It is typical of the perverse
incentives that such controls create. At this stage, the government cant let
the smuggling issue get in the way of tackling the current account deficit
(CAD), but the downstream non-financial effects are considerable. The money
& the expertise that criminals build
have many collateral effects.
Arguably, the whole of Mumbais underworld was a creation
of years of smuggling during the 70s and 80s. While the time scale over, which
gold smuggling happened earlier was much longer, the value is likely to be
scores of times higher now. And then theres the spillover effect on the
economies of other countries.
Gold that is smuggled into India is first imported into
other countries. Last year, Sri Lanka found its gold imports shooting up and
its CAD worsening. It imposed heavy duties (up to a 100% for some time..!) and other restrictions to prevent it from
being used as a smuggling conduit.
When Sri Lanka tightened up, most of the action shifted to
Pakistan. Last week, Pakistan placed a blanket 30-day ban on all gold imports,
citing pressure on its currency.
Incidentally, while announcing these bans &
restrictions, both countries explicitly mentioned Indias gold duties as the
root cause of their troubles. At the end of the day, it should be pretty clear
to everyone that emergency measures apart, it is worse than useless to try and
stop gold from finding its way into India.
The gold will flow in anyway, so it makes more sense to
avoid all the other harmful side effects caused by it sneaking in through the
cracks. Some day, Indians will get sensible about gold,maybe.But dont wait
around for it.
About the author…
Mr. Dhirendra Kumar is CEO at Value Research
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