The move could also result in shortages and encourage smuggling
The Reserve Bank of India’s (RBI) move to restrict import of gold consignments could impact smaller players in the gold and jewellery industry.
The aim of the government is to moderate demand for gold for domestic use, as only the genuine needs of gold jewellery exporters would be exempt.
The trigger for the move was most likely the announcement on Monday that gold imports grew 138 per cent in April to $7 billion— further burdening the current account deficit (CAD).
Gold can be imported by around 30 channel agencies, including banks and non-banks. India imported 1,015 tonnes of gold in 2012-13, and industry experts said around 65 per cent was on a consignment basis.
When imported on a consignment basis, by banks on behalf of buyers, buyers do not finance purchases, and unsold gold can be returned after 30 days. Smaller jewellers would now have to await execution of their smaller gold orders, and this could increase their costs.
The move could also result in shortages, and encourage smuggling.
Vinod Hayagriv, Managing Director , C. Krishniah Chetty & Sons, said, “as all consumption gold will be restricted supply, banks will necessarily have to import only on deferred payment, outright payment which is expensive or through high cost borrowings.” He felt the move would take bullion resellers out of business. “This service was being done by bullion dealers for the country’s jewellers, as banks were unable to stock and service, and this will be negatively affected. This will be filled by smuggled gold as the cost of bank gold will now be much higher.”
Ban bullion sales
A better way would be to only ban bullion sales to unregistered dealers (URDs), and thereby protect foreign exchange, Mr. Hayagriv said.
Suresh Jain, director, Bombay Bullion Association and director, S.J.Jain Jewellers, said, “to an extent, it will take away speculation. It seems only a precautionary step, and will not have a major impact.”