UPDATE 1-Gold smuggling in India likely to rise if curbs stay-WGC

Tue Feb 18, 2014 6:04am EST

Related Topics

* Indian demand to stay near 1,000 T in 2014 - WGC
    * Smuggling to rise if import curbs not lifted
    * Chinese demand expected to be 1,000-1,100 T in 2014

 (Adds links to factbox, timeline)
    By Siddesh Mayenkar and A. Ananthalakshmi
    MUMBAI/SINGAPORE, Feb 18 (Reuters) - Gold demand in India is
expected to be robust in 2014 and likely to encourage an
increase in smuggling if curbs on bullion imports remain, the
World Gold Council (WGC) said.
    Indian gold consumption is expected to be 900-1,000 tonnes
in 2014 for jewellery and investment purchases, according to the
WGC. That is slightly behind top gold buyer China, whose demand
is expected to be 1,000-1,100 tonnes.
    Bullion demand in India rose 13 percent last year to 974.8
tonnes, according to the WGC's quarterly report issued on
Tuesday, in a sign that consumer appetite has been largely
unaffected by government restrictions on gold imports.
    Struggling with a high trade deficit and a plunging rupee,
India was forced to impose curbs on gold, which is the
second-biggest expense in its import bill.
    A record high import duty of 10 percent and a rule tying
import quantities to export levels have crimped supply in what
was until a year ago the world's biggest bullion consumer,
prompting a sharp jump in smuggling.
    "Despite all the curbs, demand has come in at 975 tonnes.
The question obviously is where the supplies came from," said
Somasundaram PR, WGC's managing director for India. "We have
seen anecdotal evidence of smuggling. Our estimate is 150-200
tonnes, more towards the upper end."
    Smuggling could have been even higher as Indian gold imports
have sagged in recent months to 20-30 tonnes a month, compared
with a record 162 tonnes in May. Scrap gold is also being used
to meet demand.
    India's official gold imports in the first 11 months of 2013
totaled about 655 tonnes. 
    "If supply restrictions continue, then we will see a much
higher figure for smuggling," Somasundaram said, declining to
provide an estimate.
    Indian gold smugglers are adopting the methods of drug
couriers, stashing gold in imported vehicles and using mules who
swallow nuggets to try to get them past airport security.
 
    Customs officials have said that though they have increased
the number of seizures, they have been able to catch only a
fraction of the illegal shipments into India. 
    The Indian finance ministry and the central bank have
acknowledged that smuggling has increased considerably but have
said they will not ease the rules until they have a better grip
on the trade deficit. 
    "All pointers are towards some kind of relaxation,"
Somasundaram said. "One possibility is that they will wait for
the current account deficit figure till March end. The next
possibility is that they may wait till elections (in May), but
our expectation is that it will happen sometime before."
    Reducing the import duty alone will not be enough to ease
supply constraints, the WGC executive said. An easing of the
central bank's 80/20 rule, which requires a fifth of all imports
to be re-exported, will have more of an impact, he added.
 
 
    CHINA DEMAND
    Global gold demand fell 15 percent in 2013 as huge outflows
from physically backed investment funds outweighed record
consumer demand, London-headquartered WGC said in the report.
 
    By contrast to India, top buyer China is likely to introduce
reforms to make it easier for consumers to access gold in the
growing market, said Albert Cheng, WGC's head of the far east
region.
    China made a string of changes last year, including granting
approval to its first gold-backed exchange traded funds and for
import licences to foreign banks for the first time.
 
    "It is a measure to make sure that there are more suppliers.
I think there will be a further opening up of the market," Cheng
said, though he didn't elaborate.
    Chinese demand in 2013, which soared 32 percent to 1,065.8
tonnes, was supported by significant growth of both
manufacturing and the retail network, and that will continue
this year, Cheng said.

 (Editing by Muralikumar Anantharaman and Jane Baird)
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