India's gold smugglers back in business

A gold jewellery showroom in New Delhi.

INDIA - The three boxes of consumer durables, including a television and a food processor, that a man was bringing from Dubai through the New Delhi airport looked legitimate enough. But, somehow, things did not seem quite right to the Customs officers.

The boxes were stapled with unusually large pins, more than 100 of them, in metallic silver colour. The officers decided to test the staples - and, sure enough, they turned out to be made of gold, all 755g of it, worth about US$33,000 (S$41,800).

It was yet another trick in an inexhaustible repertoire of ingenious smuggling techniques, pointing to a sudden spurt in smuggling of gold into the country as the price difference between legal and illegal imports soars following a sharp increase in import duties on the precious metal.

India has raised gold import duty for the third time this year to 10 per cent, and banned imports of gold coins and medallions. It was yet another attempt to squeeze demand as the country battles to bring down its current account deficit, in part caused by excessive buying of foreign gold, and improve its finances.

One fallout of this appears to be an increase in smuggling of the precious metal.

"Smugglers are taking advantage of the higher cost of importing through the legal channel," says Mr Suresh Hundia, former head of Bombay Bullion Association.

The amount of smuggled gold seized soared 365 per cent in the first quarter of this year over the same period last year, and Customs officials say that is only about 10 per cent of the total amount of gold arriving in India through illegal means.

Legal imports in the four months through July stood at 383 tonnes, more than 85 per cent up from the same period a year ago, but much lower than levels in 2011 when overseas purchases stood at a record 969 tonnes with import duties at around 1 per cent. Government measures had helped squeeze imports by 11 per cent last year to 860 tonnes.

Much of the gold smuggled into India is from Dubai and Bangkok. After the latest duty hike in India, gold costs about US$4,200 less per kg in Dubai, offering a lucrative margin to smugglers.

Smugglers seem to be using India's neighbourhood as well to bring in the contraband. Hundreds of kilograms of gold destined for India have been seized in Nepal and Bangladesh in the past few months.

"Past efforts at curbing gold consumption, when the government introduced restrictions on gold trading and ownership, merely resulted in an increase in smuggling," says Prof Abhirup Sarkar, professor of economics at Indian Statistical Institute.

Gold smuggling was once the staple of the Mumbai mob, glamorised in countless Bollywood films. Until 1992, importing the yellow metal was banned in the country. In those days, smugglers hid gold bars and coins in hollowed-out shoe soles, false bottoms in luggage and stuffed the contraband in their own bodies. More organised gangs smuggled in gold by sea and through land borders.

Use of "couriers" is once again on the rise, from destinations such as Dubai. A courier makes about US$500 to US$1,000 depending on the size of the consignment, police say.

In some cases, no couriers are used, says Customs Commissioner of Delhi N.L. Butalia, whose team caught the gold staples in June.

"Recently we intercepted a packet of toys sent from Hong Kong to a post office (in India) in which solid gold was hidden in the battery slots," she says.

Gold demand in India is largely price-inelastic, fed by the country's historical obsession with the precious metal. It is used mostly for making jewellery, traditionally part of a bride's trousseau and dowry, and also as an investment.

A bountiful monsoon this year has raised hopes of increased incomes for India's large rural community, a voracious consumer of the yellow metal.

But the industry is not convinced India's gold gluttony can be satiated.

"No doubt, a hike in duty in gold imports would curb demand for gold in the short run," said Mr Chandrajit Banerjee, chief of the lobby group Confederation of Indian Industry, in a statement on Tuesday. "From a long-term perspective, it is counterproductive as it would encourage smuggling of the precious metal."

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