Commonwealth Network

The Indian Budget 
1996-97 The Indian Economy Overview

IN DEPTH: Gold Obsession

India is the world's largest consumer of gold, but does not produce any gold of its own. The ever increasing demand for the precious yellow metal, subject to high import duty, is fuelling a multi-million dollar gold smuggling racket.

India's history and myth are a glitter with gold and jewels. Rumor has it that in the oldest South Indian temples, the inner sanctum brims with gold offered in devotion to the gods.

Even though millions of Indian people live in poverty, India is the world's largest consumer of gold. Not just a luxury for the rich, every family acquires and gives gold on special occasions. From a bride's wedding ornaments to a baby girl's first gold earrings or the gold grain placed in the mouth of a deceased loved one, gold is the touchstone of status and security.

The perpetual demand for gold, which India does not produce, is a major drain on the economy. Higher incomes, thanks to economic reform, have boosted the demand, but a drop in gold production (especially in South Africa) has forced prices up and high duty on imported gold has Indians turning to smugglers to satisfy their obsession.

According to the Bombay Bullion Association, last year India lost an estimated Rs 6,000 crores (Rs 60 billion, about $1.7 billion) of foreign exchange through smuggling, but the figure could be higher. Even though the government has legalized the import of gold, smuggling went up to 134 tonnes in 1995, from 118 tonnes in the previous year. The government lost over 25,000 crore ($7.2 billion) to bring in smuggled gold.

Efforts to curb smuggling by liberalizing the import of gold have failed. Import duty is still high at Rs 220 per gram, and an importer must obtain a license, the premium on which fluctuates according to the market value of gold, among other factors.

Customs officials find it difficult to identify smuggled gold, because so much legal gold is coming in, much of which is unmarked. Without identification numbers on gold bars, forged documents can be easily mocked up and bars transferred to cover for unofficial supplies.

The World Gold Council says the Indian market for gold is expected to double in 1996. Last year India's official gold consumption was 477 tonnes. By the year 2000 it could reach 1000 tonnes. This is bad news for India's economy unless the government makes an effort to further liberalize its import schemes to make smuggling unattractive.

Jennifer Morrow is a Canadian radio journalist based in New Delhi. She edits a publication on social and current affairs in South Asia, and is a freelance correspondent for the Voice of America.
She is a member of the Indian Economy Overview editorial panel.

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