Gold has long fascinated me. The British banned its import into India in 1939, on the onset of World War II, in order to conserve foreign exchange. The new rulers of independent India continued the ban because they believed that importing gold was a waste of foreign exchange. The Indian people did not think so; they would much rather have imported gold for their jewelry than machines for Nehru's "temples of modern India". Their demand was met by smugglers, who made huge profits. They invested some of the profits in films in Bombay. When I was in the finance ministry in 1991-93, I tried to persuade Manmohan Singh to free gold imports; but he did not. I had then also talked to P Chidambaram, who was commerce minister; he liberalized gold imports when he became finance minister in 1998. Chand Mehra was an unusual young man - a scion of goldsmith family who went and got a degree from California. He came back with an ambition of exporting jewelry. The corrupt officials of the commerce and finance ministries tied him up in knots and sabotaged his business. This is what I wrote about him in Business Standard of 16 January 2001.
THE CONTINUING SCANDAL OF GOLD
Last week, Bombay crime police arrested Nazim Rizvi
for links with Dawood Ibrahim; soon after it arrested Bharat Shah who financed
a film of Rizvi. The Bombay Association of Diamond Merchants called a meeting to
protest against Shah’s arrest. The sensex declined. What is the connection
between films, diamonds, shares and crime?
India banned import of gold during World War II.
From then till 1992 the entire domestic demand was met by smuggling. There was
never a shortage: the ban was only on paper. That gold had to paid for in
sterling; Indian parents bought gold for their daughters in Rupees. Rupees had
to be converted into Pounds. One way this was done was by declaring a lower
value for exports to the customs than they were actually sold for, and
receiving the difference abroad in foreign exchange. Gems have no easily
ascertainable value; so they were a favourite medium for underinvoicing. The
other was to buy exchange from workers abroad in return for Rupees delivered to
their homes in India. This conversion business was called havala. A few big
criminals in Dubai and Pakistan controlled most of the smuggling as well as
havala business. They invested their huge profits in Bombay films and shares.
From the profits they bribed, intimidated or killed whoever in the governments
could obstruct the illegalities. This was the connection between smugglers,
jewellers, film financiers and stock market operators -– all of which are being
unravelled in the Rizvi-Shah case.
That was the story till 1996 when P Chidambaram
allowed a few banks to import and sell gold. That gave a death blow to both
gold smuggling and havala; I thought the story was over, and lost interest.
But, unnoticed, Yashwant Sinha raised duty on gold imports
in 1998, and gave new life to smuggling and havala. Do not ask me why. I have
heard rumours about a struggle for the support of certain Bombay politicians
who were the smugglers’ godfathers. More cannot be said here. But if you want
to get to know the deep machinations, follow a case that has been filed in
Delhi High Court – Enchanté Jewellery Ltd and Others vs Union of India and
Others (Civil Writ Petition No 7803 of 2000).
The man behind Enchanté is Chand Mehra - a slight,
lively young man of 36. He looks younger than his age because instead of being
worn down by his troubles, he fights. He is always laughing because he somehow
finds his tormentor ridiculous. The tormentor is the Government of India. He is
one of the many entrepreneurs ground down by the racket I described. But
instead of being intimidated, he has fought the system in the public arena. For
this he has been abused, threatened and shot at. Literally.
Chand graduated in management from Claremont
Graduate University, California, and came back to India in 1990. Seeing a huge
market for branded jewellery abroad, Chand imported equipment from Italy, and
took on an export obligation of six times the value of the equipment to avoid
import duty to be fulfilled within five years.
Adding value: When he tried to export,
DGFT stipulated that the value of his exports had to be 10 per cent greater
than the gold it embodied. Branded jewellery is a commodity business all over
the world; no retailer would give a manufacturer more than 3 per cent making
charges. So a single line in the government’s export-import policy had made it
impossible for Chand to export. But he found that others were exporting,
remitting to the buyer abroad 7 per cent of the contract value through havala,
and getting back 10 per cent value added to satisfy the government. Instead of
doing that, he asked for a reduction in the value addition norm. He was told to
make up his loss on havala from the incentives he received. But he continued to
make himself a nuisance. Finally, the government brought down the value
addition to 3 per cent in 1998 – but he had lost three of the five years in
which he was supposed to export.
Importing
gold: Then
he found that he was not allowed to import gold to make the jewellery for
export; MMTC, owned by the government, was given a monopoly of import by –
guess who - the government, and he had to buy the gold from it. For this
unsought service, MMTC charged 0.8-1.25 per cent commission – that is, 25-40
per cent of the making charges of 3 per cent. Manufacturers in Malaysia or
Singapore could import gold directly and did not have to pay any such
commission. That straightaway put Enchanté out of business. So Chand began to
represent against the MMTC monopoly.
There was another way he could buy gold: he could
buy it in the open market. All gold was smuggled in till 1992. Then the finance
minister allowed returning Indian passengers who had been away for six months
to bring 5 kg of gold with them. Immediately the big smugglers lined up Indian
workers who were going to visit India, and used them as couriers; the gold they
carried was passed on to the existing illicit channels. But for this gold the
government did not give any foreign exchange; the smugglers had to buy it in
the havala market. So the price of gold in India was 17-18 per cent higher than
in Dubai. That made domestically available gold too expensive for manufacturing
exportable jewellery.
The third possibility was to buy gold imported with
special import licences issued to exporters. SILs were sold in the market at a
premium of 13-14 per cent; this premium made gold imported with them too
expensive too.
Chand kept writing to the government to remove
MMTC’s monopoly. Finally, P Chidambaram, when he became finance minister,
allowed a selected set of banks to import and sell gold, and the commission on
imports fell to a quarter per cent. Thus it was only in 1997 that Chand got
gold at a price affordable for exports – until Sinha raised the duty and
effectively restored business to the smugglers.
Hallmarking: Indian jewellers were well known for cheating
on the gold they used in jewellery. Pure gold is taken as 24-carat; 18-carat
gold, for instance, has 75% gold and 25% of other alloys. Indian jewellers
would routinely pass off 18-carat gold as 22-carat. So they had an abysmal
reputation; to overcome it, Chand needed someone to certify the gold content of
his jewellery – to hallmark it. It is only now, after five years of effort,
that hallmarking facilities have come up in India.
But those were five years lost; in those five years,
Chand could fulfil only 20
cent of his export obligation. So the Department of
Revenue Intelligence of the finance ministry attached his and his company’s
bank accounts, and threatened to attach the property of his entire family. The
nexus between policy and illegal business, between controls and the profits of
breaching them, has proved too strong till now; only the courts can break it.
Let us see who proves stronger – justice or laws designed to serve outlaws.
