India, the world’s second-largest gold consumer, will probably keep restrictions on imports to control the current account deficit and defend the rupee, said the managing director of the country’s biggest refiner.
The limits would result in shipments of 650 metric tons to 700 tons in the 12 months started April 1 from 650 tons a year earlier, according to Rajesh Khosla at MMTC-PAMP India Pvt. Purchases were 845 tons in 2012-2013, the finance ministry says. While the form of restrictions may change, the government will continue to restrain buying, he said in an interview.
India represented about 25 percent of global demand in 2013, the World Gold Council says. Prime Minister Manmohan Singh requires importers to supply 20 percent of purchases to jewelers for export and sell 80 percent on the local market. Singh also raised import taxes and only allows banks and government-nominated entities to ship in gold. The new finance minister may review the rules after elections in progress now.
“I’m sure he will do something on 20:80,” said Khosla, referring to the import regulations. “You may come up with a quota system, you may come up with an auction system, you may ask the banks to bid. Freeing the import of gold as it used to be prior to the 20:80, I don’t think that is going to happen,” he said in New Delhi on April 8.
China overtook India as the biggest consumer last year. India buys almost all its gold from abroad. Unofficial imports almost doubled to 200 tons in 2013 while official flows dropped 4 percent to 825 tons, the London-based council estimates. Gold climbed 8.5 percent this year to $1,303.77 an ounce today.
National Elections
The country will have to go “slowly and steadily” in removing these curbs, Raghuram Rajan, governor of the Reserve Bank of India, said this month. “It would be useful for some of the big uncertainties facing us to be behind us rather than still in front of us before major actions are taken. I do not rule out smaller steps.”
India levies a tax of 10 percent on gold imports after increasing the rate three times last year. Federal elections will be concluded next month and opinion polls show the opposition Bharatiya Janata Party will emerge as the largest party while falling short of a parliamentary majority.
While the government may remove some of the curbs, they won’t do so completely because that would hurt the current account deficit, Victor Thianpiriya, a commodity strategist at Australia & New Zealand Banking Group Ltd., said yesterday.
Indian DNA
Bullion contributed to almost 80 percent of a record $87.8 billion deficit in the year ended March 31, 2013. The shortfall in 2013-2014 would be contained below $40 billion, Finance Minister Palaniappan Chidambaram said March 7, less than the $70 billion target. That helped the rupee rally about 14 percent from a record low in August.
The nation needs other measures to reduce its demand for bullion imports, Khosla said.
“Gold is the Indian DNA,” he said. “Throttling the supply of gold is not the answer.” Government analysis showed India could set aside $30 billion annually to import gold and keep its current account manageable, he said. “With gold at $1,400 you come to around 650-700 tons. That’s the ballpark figure for you, whoever is in government.”
With demand in India about 1,000 tons a year, the remaining 300 tons would be met through monetization of some of the 20,000 tons sitting above ground, Khosla said. Owners would deposit gold with banks for a set period for a fee and the banks would refine it before lending to jewelers, he said.
Doubling Capacity
MMTC-PAMP’s plant located 35 kilometers (22 miles) from New Delhi airport has the capacity to produce 100 tons of gold and 600 tons of silver annually. It plans to double gold output to 90 tons by the end of this year from 45 tons in the year ended March 31 after the government allowed continuous imports of 15 tons of dore every two months. Dore, a raw material, may contain about 80 percent gold and 15 percent silver, he said.
The refinery, owned 72 percent by Switzerland’s MKS Holdings and 28 percent by MMTC Ltd., will double its gold capacity to 200 tons by November, Khosla said. The country should expand its refining industry and boost dore imports because processing creates value for India, he said. Use of scrap should also increase, he said.
“Our raw material is mainly dore now,” Khosla said. “If you looked at the long term, the raw material for this plant let us say 10 years from now, I would say 50 percent is dore and 50 percent is scrap. All internal scrap.”
