Government Surprises India’s Jewellery Industry

India’s jewellery industry recently received a big surprise from the government when it scrapped the 80:20 scheme with immediate effect which was introduced in August, 2013 to curb inflow of gold.

Yes, the industry leaders term it as a surprise because they were in fact expecting some more stringent rules from the government to control the imports of gold which have sharply increased during last couple of months. No one had ever imagined of the government to relax the existing gold import rules at a time when consumption of the yellow metal (we have seen the figures last week) was going out of control.

A statement issued by the Reserve Bank of India (RBI) last week declares, “It has been decided by the Government to withdraw the 20:80 scheme and restrictions placed on import of gold. Accordingly, all instructions issued about the scheme from time to time are withdrawn with immediate effect.”

It has been observed by the domestic sector that the import curbs have hampered India’s world-beating domestic jewellery industry and encouraged smuggling. In the process, jobs, growth and tax revenues have also suffered, as business shrinked for jewellers and smugglers skimmed the cream of demand – reducing revenues from legal gold imports.

No specific reason is given by the government behind this move. Industry sources here say that the 80:20 scheme was successful because gold imports had drastically come down initially but the imports surged after some relaxations were given by the then UPA government in its last days. So the industry circles here feel that the ‘artificial curbs’ have ended up boosting smuggling rather than reducing the actual demand for gold.

Chairman of All India Gems and Jewellery Trade Federation (GJF) Mr. Haresh Soni says, “We believe the move (to scrap 80:20) would do away with the biases and calm down the market which was expecting some more curbs to restrict gold imports. But on the contrary, the government has given a fillip to the industry by relaxing the import norms. The 80:20 was totally impractical scheme as it was promoting monopolistic business practices. With withdrawal of this scheme, gold prices are expected to come down as there is a dip in overall demand in global markets. Crude prices are already down and now importers also are expected to charge less premium on import of gold.”

Managing Director of the World Gold Council (WGC, India) Managing Director Mr. Somasundaram PR while welcoming the Government’s decision says: “The timing of this move though surprising, would certainly boost confidence of the jewellery industry. The official supply situation now must ease to benefit genuine exporters and manufacturers.”

But there is speculation that the government would in near future tighten other parts of its import legislation. The 80:20 scheme was introduced in August 2013 to reduce the Current Account Deficit (CAD). While imports of gold reduced significantly and the position on CAD improved, industry insiders feel that there was a lot of smuggling taking place to fulfil the domestic demand. The easing of norms by allowing recognized Star Trading Houses and Premium Trading Houses to import gold under the 80:20 scheme, had also raised some concerns, particularly in the last few months when imports of gold spiraled.

Whether the 80:20 scheme would be replaced by new scheme or whether jewellers would be allowed to import gold freely is not quite clear at present. But the industry leaders here feel that that the government would take some time and watch the gold import trends for a few months and their impact on CAD before taking the next step. But at this juncture however, India’s jewellery industry views the withdrawal of the 80:20 norms as a positive step.

Posted by Suresh Chotai