Restrictions on India’s gold imports will be reviewed by the end of March if concerns over the country’s external balances ease up, India’s finance minister, Palaniappan Chidambaram, said on Monday.

As the second largest gold importer after China, any shift in India’s import policies could have an influence on world markets. However, much depends on how policymakers judge their progress in bringing down the current account deficit.

“In the long term, policy repression is not the solution. We have to look at a way to increase our exports and earn foreign currency to pay for our imports,” the finance minister said in his speech to customs officials on Monday. “We will relax the curbs only when we are absolutely sure that we have a firm grip on the current account deficit and the balance of payments situation.”

Given what central bank governor, Raghuram Rajan, said in Tuesday’s monetary policy statement, India could be in a position reel in restrictions on gold imports in the coming months. Rajan now expects a current account deficit of under 2.5 per cent of GDP for the current financial year, down from 4.8 per cent in the previous 12-month period.

However, relaxing import restrictions could risk undoing much of the progress that has been made in bringing the current account under control. According to analysts at ANZ, a fall in gold imports was responsible for 70 per cent of the $16.6bn reduction in India’s current account deficit between the second and third quarters of 2013.

Nevertheless, powerful voices are campaigning in support of Indian jewelers, who have been hit by the controls. According to local media, Sonia Gandhi recently wrote to the Department of Commerce requesting some help for jewellery exporters.

In effect, she is making a plea to reduce import duties, which have been hiked gradually over the past year to a record 10 per cent, and relax the so-called “80:20 rule”, a quantitative restriction introduced a few months ago which requires importers of gold to re-export 20 per cent of their shipments.

In particular, it is this second rule that brought a slump in official inflows in India as the government failed to provide clarifications. That was bad news for local jewellers, who ran short of supply but it was a big boon for the domestic economy as imports dropped sharply amid the confusion.

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But Remember, these are just the official numbers. As Chidambaram admitted on Monday, it is estimated that up to 3 tonnes of gold are being smuggled into India every month at the moment as formal channels have closed up.

Of course, it isn’t clear how much duties could be slashed and how the quantitative restrictions could be tweaked.

In a note to clients last week, analysts at ICICI Bank estimated that the removal of restrictions on gold imports would raise India’s current account deficit by just 0.3 per cent of GDP.

They said:

We believe that removal of restrictions is likely to have a limited impact on gold imports bill. Our calculation suggest that (if) India’s gold imports in volume terms were to surge back to FY2013 levels in the next fiscal year (FY2015), still the total gold import bill is expected to come lower at USD 39 bn in FY2015 as compared to USD 33 bn in FY2014 and USD 54 bn in FY2013.

Look at their forecasts and it seems a reduction in prices is at the heart of that analysis:

Given the pressures from industry – now backed by the matriarch, Mrs Gandhi – and the pressures to meet deficit targets, India’s policymakers will be hoping these forecasts are correct.

Related reading:
Pakistan: trying to stem the gold flows to India, beyondbrics
India trade deficit narrows, but watch the gold, beyondbrics
India trade balance: better, but gold concerns persist, beyondbrics

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