India's appetite for gold bullion is effectively insatiable. It is truly the form of wealth storage favored by the vast majority of the country's 1.25 billion people. While this is great for the citizenry, it contributes to widening the government's trade deficit—meaning that the value of imports (including incoming gold bullion) outweighs the value of India's exports.
Judging by the level of gold-buying fervor among the public in India, as well as the emphasis the central government has placed on devising policies that will curb these gold purchases, the roughly 1,000 tonnes of gold bullion imported into the country each year (worth over $36 billion at today's prices) has a big effect on the negative trade balance.
Attempted Gold Regulations
Since the times of Ancient Rome, India has been known as a "black hole" for gold: Anytime it goes into the country, it is never seen again!
The constant wave of gold purchases by Indian citizens has driven the government to explore various gold regulations that would curb the ridiculous volume of gold imports. Considering that virtually none of the gold that enters the country ever leaves, these gold regulations (some proposed, some enacted) have been among the main priorities of the Modi administration.
Beginning in August of 2013, for instance, the Indian government imposed a 10% import duty on gold. (This was done just prior to PM Narendra Modi taking office.) The policy backfired badly: Not only did the measure fail to reduce gold demand, but it helped drive black market purchases. The various gold smuggling rings in and around the country sprung to life as a response. The World Gold Council (WGC) estimated that 175 tonnes of gold (almost 20% of the annual total) was illegally imported into India in 2014.
Much has been made of gold being smuggled into India. However, a newly-implemented gold regulation is tightening restrictions on how gold purchases are reported for tax purposes. The government is now requiring large purchases of gold jewelry (the most common form of gold that Indians buy) to include the buyer's PAN (Permanent Account Number), which is essentially a tax ID.
The Taxman Cometh
Through the issuance of PAN cards, the government of India hoped to track—and, of course, tax—any large gold purchases. The threshold for what is considered "large" and would trigger mandatory reporting was set at 200,000 rupees, which is just shy of $3,000 in the U.S.
Only 3% of the country's population actually pays income tax. Among India's 1.25 billion people, just 223 million people hold PAN cards. The proportions are even lower for rural farmers, who make up two-thirds of the country's overall gold demand.
By requiring large jewelry purchases to include the buyer's PAN, the government has actually spurred greater under-the-table gold purchases and structured payments to avoid such tax reporting.
Many gold dealers and jewelers have shifted toward "unofficial" (i.e. unreported) sales due to the new regulation. According to Mayank Khemka, the managing director of a jewelry company in India, "No one wants to lose customers just because they don't have a PAN card."
Another consideration is the structuring of purchases in order to keep sales totals below the reporting threshold. This has increased the use of informal receipts and under-the-table transactions.
"Most large buyers are not interested in giving PAN card details," said Mangesh Devi, another Indian jeweler. "Instead they ask us to split the bill under the names of the husband and wife or make purchases in installments."
The plight of Indian farmers understandably means more to these local jewelers than burdensome gold regulations. Gold dealers are willing to make unofficial sales not just because of the potential for lost revenue, but because they know these customers are struggling farmers. Passing down gold jewelry is a deep-seated tradition in India, and to deny these farmers and their families due to inelegant government rules seems heartless.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.