How UPA's gold import scheme provided fodder for PNB scam

The scheme, touted as a panacea to burgeoning CAD, was a huge flop that fostered a spike in smuggling and allowed several Gitanjali-like players to make a killing

When, on May 13, 2013, jewellers were busy selling hundreds of tonnes of gold imported during the past month-and-a-half on Akshya Tritiya day, the country’s central bank issued a circular in the afternoon spoiling the party and marking beginning of restrictions.

The Reserve Bank of India (RBI) asked banks not to import gold on consignment basis, setting the stage for the most controversial and draconian step for bullion trade since the imposition of the Gold Control Act.

Politicians who now blame the UPA government for a policy decision made during P Chidambaram's tenure as finance minister are actually barely scratching the surface.

Pointing fingers at fraud-tainted Gitanjali Gems and Nirav Modi, Union Minister Ravi Shankar Prasad had on Tuesday alleged that it was the 80:20 gold import scheme of July 2013 that had provided fodder to the accused, Mehul Choksi and Nirav Modi, to carry out the PNB scam.

However, bullion market veterans say that what is being discussed in the media and by politicians is just the tip of the iceberg.

They say that while 80:20 was a 'mountain of scam' in the name of controlling Current Account Deficit (CAD), everyone is talking only of a molehill called Gitanjali.

In any case, the scheme was a massive failure.

The actual beneficiaries sold several hundred tonnes of gold at $100-plus premium.

There were many Gitanjali-like players who took advantage of the scheme.

One PSU bank with high non-performing assets (NPA) was even instructed by ‘unidentified’ bosses (having past connections with that bank) to sell gold to a particular jeweller-refiner at a single-digit premium, when private banks were selling gold at prevailing premiums of as much as $100 per ounce.

What is the 80:20 scheme?

The scheme was introduced when gold imports had hit unprecedented highs and were exerting pressure on CAD, resulting in a sharp fall in the rupee exchange rate against the dollar, which was quoting at nearly Rs 70.

Following government consultations (or instructions, if you will) the RBI issued a circular on July 22, 2013, stating all gold imports would come with a commitment of re-exporting 20 per cent.

The export conditions were such that each lot of import must meet export requirements in order to import another lot.

Export zones were kept out of the scheme. So, of all the imported lots, 80 per cent could be sold in the domestic market, provided 20 per cent was exported. since gold imports must have RBI sanctity, they were executed through the apex bank with instructions from the finance ministry.

Did 80:20 help control CAD?

Import of gold in April and May 2013, prior to the imposition of restrictions, was 294 tonnes worth Rs 77,000 crore or $14.4 billion.

This was a record high then and such a high import bill has not been repeated since.

After these two months, when restrictions kicked in, total gold imports in the following 10 month of 2013-14 stood at 325 tonnes.

Import duty on gold in January 2012 was Rs 300 per 10 gram.

It was raised to 10 per cent of value by August 2013. Since none of these worked, the government took the drastic step of restricting import.

Imports fell from over 300 tonnes in May 2013 to just 10 tonnes in a month after imposition of 80:20.

However smugglers made huge money as they were getting 10 per cent duty margin plus premium, as there was huge shortage of gold.

Smuggling, which was not prevalent prior to 2012, crossed 100 tonnes and was financed through hawala or unofficial dollar.

Had 80:20 not been there, this foreign exchnage would have come through official channels.

Who gained?

After that several clarifications issued on 80:20 only to further complicate the matter and ensure that a clutch of exporters benefited.

A source who studied the implications of the scheme thoroughly said, “If exports rose, future eligibility to import for domestic market would rise in sync, and hence, ignoring value addition norms, certain export houses began exporting on the same day of importing.

"This was was nothing short of round tripping.”

If government wants to really investigate, it should focus on what went wrong, how 80:20 was mismanaged and who were real beneficiaries.

It should check the correspondence of department of finance ministry handling gold policy then and question the hasty manner in which the import norms were relaxed, when new government was to take charge in a few days time.

It must find out who instructed banks to sell gold at negligible premiums to benefit private players.

Photograph: Heinz-Peter Bader/Reuters

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