In today’s Finshots, we tell you what makes India an attractive destination for gold smuggling.

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The Story

Last year, an unbelievable heist known as Project 24 Karat went down at Canada’s Pearson International Airport. Some very clever thieves targeted a massive 400 kg shipment of gold coming in from Switzerland. With a little help from some airline employees and forged documents, they waltzed right into the Air Canada Cargo terminal where the gold was being kept. And then made off with the entire consignment, worth about $20 million, vanishing without a trace. Authorities only realised what happened when the gold was reported missing.

Despite several arrests, tracking down the missing gold is proving to be a real challenge. That’s because smuggled gold bars and coins often get melted down, wiping out any identifying marks that could trace it back to its original source.

And now, investigators believe that some of this stolen gold has likely been smuggled into India.

Why do they think so?

You see, India has a deep love affair with gold. No Indian wedding, celebration or festivity is complete without it. And this passion for gold means that India's average annual demand is about 8 lakh kg.

But here's the catch. India doesn't produce nearly enough gold to meet this huge demand. In fact, the country only produces a little over 1,000 kg of gold each year, all of it from the Hutti Gold Mines. And so we end up importing a lot of gold to make up for the shortfall.

This is the starting point that makes India a gold smugglers’ paradise. The reason is simple. Importing such vast quantities of gold each year means that the government has to spend a lot of foreign currency. This puts extra pressure on the Current Account Deficit, which happens when a country's total imports exceed its exports. To manage this, the government adjusts the import duty on gold. Meaning, when they see gold imports soaring, they hike the duties to discourage buying.

But this move actually encourages smugglers because people's love for gold never fades. Higher demand and lower supply push up gold prices. And smugglers jump at the chance to bypass legal channels and avoid paying duties. This means that smuggled gold comes in cheaper and can be sold at higher prices. Eventually, this smuggled gold mixes with legally imported gold and finds its way to jewellers.

How’s that, you ask?

For starters, smugglers cleverly use SEZs (Special Economic Zones) to sneak gold into India. They know that SEZs offer exemptions from customs duties and taxes on goods meant for use within the zone or for export. This means that gold imported into an SEZ can bypass the usual hefty import duties, making it an attractive loophole for smugglers.

And here's how they do it. First, they’ll overreport the amount of gold they’re bringing into the SEZ. For instance, if they’re actually importing 5 kg of gold, they’ll declare it as 20 kg, simply because it gives them permission to trade in a higher amount of gold duty-free. The authorities are less likely to question the shipment's weight if it's mixed with imitation jewellery and other metals alongside the real gold.

Once the gold is inside the SEZ, smugglers pretend to export the same amount they declared. Here’s the trick. A SEZ company dealing in gold arranges for Passenger A to carry jewellery in their hand luggage, ostensibly for export. Passenger A might be travelling abroad via a connecting domestic flight. At the same time, Passenger B, with a bag full of imitation jewellery, also boards a different domestic flight from the same airport. Both passengers pass security checks and then swap the contents of their bags in a secluded spot, like a washroom. This means that A carries the imitation jewellery abroad, while the actual gold exits the SEZ and enters the domestic market through loopholes.

Of course, this scheme often involves corrupt officials who turn a blind eye for a bribe. And that’s how smuggled gold seamlessly blends into the legal market. They leave no trace of transactions because the illegal gold trade is often backed by hawala, and off-the-books and off-banking money transfer system that leaves no paper trail.

But that’s not the only loophole smugglers exploit. India’s extensive coastlines and land borders with several countries make it incredibly challenging for the government to monitor and control every entry point. Smugglers take full advantage of these vulnerabilities to bring gold into the country illegally. This also explains why coastal states like Maharashtra, Tamil Nadu, and Kerala accounted for over 60% of the gold smuggling cases registered in the country in 2023.

Put all of these things together, and you’ll see why gold smuggling in India has been on the rise. To put it in perspective, in FY23, the CBIC (Central Board of Indirect Taxes & Customs) and DRI (Directorate of Revenue Intelligence) confiscated 3,500 kg of gold. But in FY24, that number shot up by about 30%.

The root cause?

Increased import duties and other taxes on gold over the past few years coupled with the gold price rise owing to the Russia-Ukraine war.

Sidebar: Gold prices rise during events like wars because investors shy away from risky assets and turn to gold to protect themselves from economic downturns.

So yeah, the government is stuck in a "to hike or not to hike" dilemma regarding import duties on gold. And this ongoing conundrum makes it easier for smugglers to exploit other loopholes and find ways to bring gold into the country illegally.

The best way for authorities and the government to crack down on gold smuggling is by stepping up their game with smart strategies. This includes advanced passenger profiling, risk-based checks, targeting cargo consignments, thorough aircraft inspections and working closely with other agencies.

How long until that happens? Only time will tell.

Until then…

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