Declining bullion trade in Mumbai needs transparent systems

Declining bullion trade in Mumbai needs transparent systems
SANJIV AROLE

MUMBAI, AUG 26: It is not often that a trade gets an opportunity to turn over a new leaf. The bullion trade in India got one such opportunity in 1990, when the Gold Control Act was abolished. Then, the bullion trader got rid of the stigma of being branded as smugglers following the permission for legal imports of both gold and silver. Now another golden opportunity awaits the bullion trade.

An industry that was forced into hibernation for nearly 30 years is now slowly getting used to working in an environment devoid of many curbs and controls. For the last 10 years liberalisation of the bullion trade has seen the supply-side of the bullion trade in India change drastically. Apart from the gradual change in the pattern of bullion imports, gold as well as silver can now be imported by nominated agencies and banks through OGL. Moreover, The Gold Deposit Scheme was launched last year by several banks. And in April this year hallmarking was introduced (albeit on a voluntary basis) following a joint initiative by the Bureau of Indian Standards (BIS) and the World Gold Council (WGC).

It is indeed ironic that India which consumes over 40% of the world's gold production every year has little or no say on the international bullion markets or gold prices. At long last, it seems to have dawned upon the authorities that trading on an exchange (spot, as well as futures trading), in fact, provides the hedging option. An option, which in turn necessitates transparency in operations and correct information which will ultimately lead to reduction in fluctuation of prices. Moreover, the government too needs to understand that increased taxation does not mean more revenues. On the contrary, the history of the past so many years has made one thing clear, controls and higher taxes do not pay, it only drive trade underground and generate more black money.

Declining role of Mumbai: One the major ironies of the post-liberalisation period, has been the fall from grace of Mumbai as the premier bullion centre in the country. All through the years and even after the abolition of the Gold Control Act, in 1990, and the subsequent liberalisation of bullion imports, Mumbai continued to import more than 80-90% of the country's bullion requirements. However, in the last few years, this percentage has now fallen to almost single digit, more so in silver.

The bullion trade blames the high incidence of sales tax and octroi duty for this sad state of affairs. This they argue is the primary reason for most of the trade leaving the city to greener pastures in neighbouring Ahmedabad, Delhi and now Jaipur.

However, the government refutes this contention of the trade. It is pointed out by the state government and the municipal corporation that over the last few years, the number of jewellery shops in the city of Mumbai have actually risen manifold. It is estimated that from about 150 during the Gold Control Act the number of bullion shops have risen to more than 20,000 today, about 100-200 new shops open every year. If higher taxes were the cause then it is argued that shops should have decreased, not increased.

There is another serious allegation against the trade that of cheating the consumers over the last several decades, by palming off lower carat jewellery as that of higher caratage. Is it just a coincidence that Mumbai has hardly any takers for the hallmarking scheme? For, if hallmarking is popularised then the consumer will have to pay tax and the entire trade comes above the ground.

Problems galore: While it may be true that the trade is mainly not billed in the city, what caused it? Why is it that Gujarat with its low incidence of tax and a business friendly atmosphere nets more by way of revenue than neighbouring Maharashtra? The government needs to come out of the mind set that higher rate of tax means higher revenue. And the trade too must be willing to come clean and ready to weed out the black sheep. However, there is a way out of the mess as far as taxation is concerned. Throughout the world, gold is being treated as a currency. Even Europe abolished VAT on gold (in bullion form) from early this year. If gold is treated as a currency and not a commodity, then it cannot be charged sales-tax, octroi, VAT, etc. The policy worldwide is to treat gold as a currency and not as wealth. Jewellery, of course, can be taxed. The trade on its part must realise that time has come for it to fulfill its obligation towards the hapless consumer, who has been short-changed for too long. For,as far as the layman is concerned, everyone in the bullion trade is a cheat. There is no distinction between a jeweller or a goldsmith or a bullion dealer. Cheating is, unfortunately now, more a rule than an exception. The argument that a jewellery shop-owner will buy-back his jewellery does not hold water. Why cannot the Indian consumer get the fair price for the purchase he has made anywhere in the world, according to the Vienna Convention?

Opportunity beckons: If India wants to find its place under the sun in the bullion trade and become a major exporter of jewellery it will have to set its house in order. What is required is a transparent system of trading where the customer is really the king. Trade association like the BBA should be involved in setting up guidelines for the trade, see that good business practices are followed and ensure smooth functioning overall. The move to re-introduce futures trading has found many takers. Already a web-based commodity exchange is being set up by an NRI in Hyderabad. The National Commodity Exchange is also being set up. The question is no longer whether an exchange for bullion (gold as well as silver) is needed or the reasons for futures trading. Whether a separate bullion exchange should be formed is a matter of conjecture.

A hedging mechanism has been sorely missed whenever prices have fluctuated in the international markets. Logic dictates that India should go in for a professionally managed international exchange that not only caters to its own needs but also that of the surrounding regions of Asia. India has the largest pool of IT specialists in the world. A synergy between the largest IT pool, the largest gold market and the largest pool of skilled craftsman begs to be united. A bullion exchange is a natural outcome. Will the trade rise above its own narrow parameters and take up the challenge? Will the government, for once, allow the trade to function freely and let market forces act? For otherwise, there will be no other chance.

This could go as a box or as a related article The past Not so long ago, India was the leader in gold. India was not only a large consumer and hoarder of gold it also had the best forward market. That forward market was under the auspices of the Bombay Bullion Association which then housed a trading ring, vaults and even a refinery. At its peak, the association had 814 members and the volumes traded were an astounding 2,500 tonnes of silver with 11,000 tonnes of silver outstanding. There were 18 directors including two government nominees, one from RBI and the other from FMC. The Bombay Bullion Association had all the know-how for forward trading with trader's rings and broker's offices housed in the building. Incredible as it may seem, BBA prices were published in the London Times everyday and more significantly an article used to appear daily on how the Bombay gold market fared. Bombay was the bullion centre in India. Old-timers recall with pride that he trading on the bullion exchange was far greater, bothin volume and value than the Bombay Stock exchange. Then suddenly, forward trading was prohibited, ostensibly to prevent fluctuation in prices and to prevent outflow of foreign exchange so vital for India then as it was in short supply. Then, following the China War, in 1962, the Gold Control Act was promulgated and forward trading became defunct and the association became a shell company with no business at all. And with no hopes of resumption as India was involved in two wars during the 60's, the trading rings and broker's offices were sold to a bank. Sadly, the trade went underground as it was illegal to hold gold other than in ornament form. Overnight, a flourishing trade became a pariah and had to resort to illegal means to survive. For even though the hoarding of gold was banned, India's appetite for the yellow metal continued unabated. It gave rise to smuggling and Dubai became the entryport for gold into India. In fact, many believe that Dubai flourished even as the bullion trader languished and wentunderground in India. During the 30 year period of the Gold Control Act, Italy became the largest exporter of gold jewellery and even India's Asian neighbours like Thailand, Malaysia and others went ahead and established themselves in the jewellery export market. Now, 10 years after liberalisation was ushered in, India has always to play catch up with the rest of the world.