As general elections approached, the BJP government introduced many populist measures; a couple of them were not bad, as I argued in Business World of 12 February 2004. I particularly disapprove of BJP ministers' tendency to play with gold duty; it only makes smuggling profitable, and disrupts jewelry exports.
Towards a BJP Trade Policy
The NDA
government took many populist measures in the last few weeks. But amongst them,
there are two that I find admirable. One is the reduction in the maximum import
duty to 20 per cent. It was supposed to happen this year according to the time
table Yashwant Sinha had laid down four years ago. But it was understood that
it would happen in the budget, and this year’s was only an interim budget – a
vote on account masquerading as a budget. Besides, Sinha had omitted to reduce
duty one year; so Jaswant Singh had a precedent to fall back on. And then this
is an election year; the BJP must collect millions from industrialists, and
give a quid pro quo; postponement of the peak tariff reduction could have been
one. Despite all these available excuses, Jaswant Singh went ahead and reduced
peak duty. Not only did he do so, but he also abolished the sad-looking Special
Additional Duty. It was supposed to be only 4 per cent, but it was calculated
on the value including import duty. So if the latter was 25 per cent. SAD
became 5 per cent; if the latter was 200 per cent – as it is on cars – SAD
would become 12 per cent, and so on. It was a stupid duty which only
complicated the tax structure. So I am glad it is gone.
In the other good act, Arun Jaitley removed
administrative import barriers on gold and silver and placed them on open
general licence. That surprised me. I started with a prejudice against Jaitley
for a number of reasons. First, he was Narendra Modi’s handholder in Goa and
later in the Gujarat elections. Second, he is a lawyer and so need know nothing
about trade policy; and ignorant ministers typically become puppets of
control-loving bureaucrats. And finally, he won the press’s plaudits for his
performance in Cancun. I believe the press is usually jingoistic and
protectionist when it comes to WTO negotiations; so I assumed Jaitley had used
his silver tongue in pursuit of special and differential treatment – the
ancient GATT rule by which India can ask for all sorts of concessions without
giving any.
Having formed such low expectations of him, I was all
the more pleased that he freed gold and silver. I have been engaged with gold
ever since I was in the finance ministry. One of the visitors I remember was an
Indian jeweler from Dubai; he was brought by a journalist, and he came in such
fear that he kept looking around for hidden microphones. He told me a lot about
Haji Dawood’s gold smuggling racket, and of the involvement of customs
officials and Bombay politicians. He reinforced my conviction that import
restrictions on gold had to go. Manmohan Singh was liberally inclined, but did
not feel confident enough about the reserves. He wanted to liberalize imports,
but did not want to release foreign exchange for them. So he introduced the
5-kilo scheme. It was tailor-made for Dawood; he organized a chain of couriers
to bring in gold legally. Thus was smuggling legalized.
Chidambaram broke that chain; he allowed eight banks
to import gold, and thus destroyed smuggling. But then Sinha brought it back:
he doubled the import duty on gold in 1998. And then, equally unaccountably, he
brought down the duty in 2001.
One of the importing agencies was Minerals and Metals
Trading Corporation (MMTC). It loves monopoly profits, and has little to do
these days. So it always lobbied hard for import restrictions, and for being
kept a privileged if not a monopolist intermediary in imports. Jaitley must
have overcome some stiff opposition from MMTC and its political patrons and
friends.
Now Jaitley should ask Jaswant to remove the import
duty on gold and silver. It brings little revenue. And if it is removed, Indian
jewelers will be able to buy gold at the same price as their foreign
competitors. Then they will be able to compete with jewellery manufacturers
across the world.
I have written earlier about how Chand Mehra’s
ambition of becoming a world player in gold chains was destroyed by import
restrictions on gold. Let no more young men see their global ambitions
frustrated. Let us remove import duties on all raw materials – metals,
feedstocks, commodities and fuels.
