Gold mania and terrorists

In his latest column of Ashok V Desai in BW writes some interesting story about gold imports.

The Latest Gold Racket by ASHOK V. DESAI

”Taxing gold and jewellery brings little revenue; it only makes smugglers rich and nurtures terrorists” 

”Chand Mehra is a strange character: He is a jeweler who knows English. He went and did an MBA in the Peter Drucker School of Management of Claremont Graduate University in California, and came back with the ambition of making India a world power in gold jewellery. Of the world gold production of 3,000 tons, India consumes about a quarter. It is the world’s largest market for gold, and hence naturally prized. 

When World War II started in 1939, the British government had to devote all available resources to fighting the war. The Germans started sinking British ships, there was a shortage of shipping space, and it had to be rationed. 

Gold was quite inessential for fighting the war, so its imports were banned. After the War came independence and the ascent of socialists in India; they were even more contemptuous of Indians wanting to wear gold. So the ban stayed. 

The market invariably finds a way around bans. When Arab countries suddenly quadrupled the price of oil in 1973, they became unimaginably rich overnight. They no longer had to work; they hired Egyptians and Indians to do the work for them. Hundreds of thousands of Keralans flew to work in Dubai and Abu Dhabi, and earned wages beyond their dreams. They wanted to send money to their wives in Kerala. A helpful man came and offered to do it for them. They could give Dinars to his men in Dubai, and he would ensure that equivalent Rupees would be delivered to their wives in the villages of Kerala in three days. His door-to-door service was more convenient than that of our nationalised banks, who were loath even to open branches in rural Kerala.

How did that man get Rupees? He bought gold with the Dinars, put them in fast boats, and delivered them on the coast of Gujarat and Mahrashtra. From there, his couriers delivered it to jewelers all over India. Once he had put his business in place, Indians hardly noticed that there was a ban on import of gold; they could get all the gold they wanted — at a price. 

That man’s name was Dawood. Chand’s brainwave was that he would import gold, make really light, fancy chains with Italian machines, and sell them to fashionable Indians. But to do so he had to import the machines, and to import them he had to accept an export obligation. The finance ministry had imposed a condition of minimum 10 per cent value addition on jewellery exports; the margins on exports were so slim that he could not export.

If he could not export, Chand could not produce chains. If he could not produce chains, he could not service the bank loans he had taken. So he got simultaneously in trouble with the commerce ministry and with banks, and failed. That is when I came across him, and wrote about the irrationalities of government policy. I do not know whether P. Chiambaram read me or not, but when he became finance minister in 1998, he lifted the ban on gold imports and allowed its import through banks. Since then, most of the gold has entered the country legally.

That was ten years ago. Now Chand has managed to pay off the bank, and is back in business. But now he faces another hurdle. Dawood no longer brings gold in fast boats. He gets hold of Keralans who have been in UAE for more than six months. He gives them free tickets home. All they have to do is to carry 10 kilos of gold jewellery, which the Indian government freely allows. This jewellery is sold in India, and gives sufficient profits to Dawood to fund all his profitable and patriotic — read terrorist — activities. 

Now Chand is campaigning for a ban on imports through these couriers. I disagree with him. But I see how the government has created a lucrative courier business for Dawood and his peers. The business no longer depends on a gold import ban; it depends on the fact that the import duty on gold is Rs 10.30 a gram, or 1 per cent, while the duty on jewellery is 10 per cent. By using a courier, Dawood saves this 10 per cent, plus value added tax of 1 per cent. This is a pretty fat profit margin — enough to finance a hundred terrorist attacks like the one in Bombay.

What should be done then? Gold and jewellery are too valuable per gram to tax reliably and efficiently; they can be easily smuggled, transported, manufactured and sold. So the best solution is to free them entirely of tax — of import duty, education cess, VAT and whatever else the governments care to call their taxes. Is it not unfair not to tax a useless acquisition of the rich like jewellery? No; tax the rich, not their jewellery”. 

The author is Consultant Editor of Businessworld. (Businessworld Issue 06-12 Jan 2009)