Indians love gold, and Indian governments find that galling. They come up with all sorts of schemes and tricks to make things difficult for gold lovers. This comment in Business World of 10 November 2003 relates to one such trick of Reserve Bank.
Underhand
bowling
Politicians are well known for helping
friends and benefactors and for being innocent of propriety. But Reserve Bank
has kept its reputation more or less intact. It could not have been easy when
politicians wanted banks to give loans to their sons, typists and peons. But
they were all packed into agriculturists, small industrialists and such
innocuous categories and absorbed into the system.
Those who
respect Reserve Bank and its upright governor will be shocked at what it has
done to gold trade. On October 1 it banned third-party imports of gold. For
those more familiar with the old system of import controls, it is equivalent to
imposing an actual user condition on gold importers. Ages ago, in the 1930s,
anybody could import and export anything without asking for anybody’s
permission. Then came the great war, followed by the socialist blight: it
became necessary to extract an import licence out of the official labyrinth
called the Chief Controller of Imports and Exports before one could import
anything. The licences were given to Actual Users or Established Importers; as
time went by, Established Importers were squeezed out and only Actual Users
could import. To be called an Actual User, one had to go and get another
licence – this time from another labyrinth called Directorate General of
Technical Development. Industrialists spent so much time getting licences that
they had no time to learn to produce; that is how India became the pariah of
the industrial world. That great commerce minister, P Chidambaram, tore down
the structure of import controls in 1992.
Many a babu had
fattened on them; to prevent them from sabotaging the reforms, he wrote out the
1992 import policy on his laptop himself. When they read it, the clerks of DGTD
went to beat him up. He was not there, so they damaged his office.
Just when we
thought we had outlived those nightmares, we have got a government that shows
great ingenuity in designing new tortures. It once decreed that tyre producers
could import rubber only through Vishakhapatnam – the port furthest away from
them. Any monopolist has just to go to the right politician or bureaucrat; if
he knows his beans, he can have a 150% import duty put on any foreigner who has
the temerity to compete with him.
And now,
surprisingly, Reserve Bank has got into the act of grace and favour. Gold has
never been freely importable. But when he was finance minister, Chidambaram did
the next best thing – he allowed a number of banks to import gold and sell it.
That broke the monopoly of Minerals and Metals Trading Corporation, which used
to make such profits on gold imports that it did not have to trade in anything
else. The banks first imported gold and sold it. But then they found a much
simpler business: they just gave an importer a letter of authority, he asked
the exporter abroad to route the gold through them, and collected it when it
arrived. By paying the banks a small commission, jewelers were virtually
importing gold directly.
And they soon
found out that foreign gold suppliers were willing to give them extremely cheap
loans against the gold. Gold is the most easily marketable commodity; its
producers and traders have much money, and they are prepared to lend it. All
they want is a letter of credit which would ensure that if the buyer does not
pay them, his bank will. A gold importer could get a letter of credit from a
bank for a commission of, let us say, 1.5%, he could get a letter of authority
from an authorized importer for say, 0.1%; and then he could import gold and
get a year’s credit at little above LIBOR – say, 1%. He could sell the gold and
keep the money for a year at a total cost of 2.6%. He could put it in a
one-year deposit with an Indian bank and earn, say, 5.6%. He could thus earn 3%
without investing anything.
It is this
business that Reserve Bank acted to stop. But its remedy is worse than the
disease. It is not those who were borrowing abroad and relending at home that
will be stopped; all jewelers and other users of gold will be. For only the
nominated banks and MMTC will be allowed to import; and amongst the banks, Bank
of Nova Scotia will recapture the bulk of the business. That is why Reserve
Bank’s decision is flawed: it should not be lining the pockets of a few,
however well connected they may be.
Reserve Bank’s
problems arise because it has no respect for arithmetic. The difference between
overseas and home rates of interest must be equal to the rate of change of the
exchange rate. Reserve Bank cannot keep domestic interest rates above
international levels and keep appreciating the Rupee. Either it must allow
interest rates to drop, or it must go back to depreciation of the Rupee.
