On 28th November 2014 Government of India decided to withdrawn the 80/20 import restriction on gold but government did not mention whether it will reduce the 10% duty on all gold imports. The restrictions on credit on gold imports remain with 100% upfront payment rule for domestic users. 80/20 withdrawal comes at a time when there was speculation that the government would tighten import rules due to increasing demand for gold, which can widen current account deficit (CAD).
There government ended the 80/20 rule because of the sharp drop in oil prices that have fallen over 25% over the last few months and are trading at five year lows. Crude Oil and Gold are the two major component of India’s imports with gold being the second largest import item.
CAD for the second quarter stood at USD 10.1 billion, which is 2.1% of GDP, compared to USD 5.2 billion last year, which is equivalent to 1.2% of GDP. The CAD for the six months period April-September 2014 was USD 17.9 billion (1.9% of GDP) as against USD 26.9 billionn (3.1% of GDP) for April-September 2013 period.
80/20 Gold Regime
Reserve Bank of India as on 22nd July 2013 issued a notice on gold restrictions. RBI in its press release said that all nominated banks/nominated agencies and other entities are to ensure that at least one fifth, i.e., 20%, of every lot of import of gold imported to the country is exclusively made available for the purpose of exports and the balance for domestic use.
Further, nominated banks/ nominated agencies and other entities shall make available gold for domestic use only to the entities engaged in jewellery business/bullion dealers and to banks authorised to administer the Gold Deposit Scheme against full upfront payment. In other words, supply of gold in any form to the domestic users other than against full payment upfront shall not be permitted.
80/20 principle would also apply for the import of gold in any form/purity including gold dore. This will be administered and monitored at the refinery level for each consignment at the time of such imports.
Effect of the 80/20 Rule
According to the data released in May 2014, India’s current account deficit (CAD) in FY14 fell to USD 32 billion in absolute term and 1.7% of GDP. The level of CAD is the lowest since FY08 when India recorded a CAD of 1.3% of GDP.
The fall in CAD is due to the fall in trade deficit that fell by 24.6% and this is due to reduction in gold import. Gold import in FY14 fell by 40%.
Relaxation on gold imports
RBI on 21st May 2014 has relaxed its gold import rule by allowing seven more private agencies (Star Trading Houses) to import the precious metal. These private agencies were barred from importing gold since July 2013. However, 80/20 rule stands as it is and the new permitted private agencies have to comply with it.