Why gold smuggling is on the rise in India

Seized gold bars kept on display by customs officers at the international airport in Calcutta

Indians traditionally hoard gold in the belief it will bring financial security. Now India, the world's largest consumer of gold, is seeing a record rise in smuggling, reports Shantanu Guha Ray.

An estimated 700kg of gold is smuggled into India every day.

Officials at India's Financial Intelligence Unit (FIU) say the country has not seen such a sharp rise in contraband gold for two decades.

They claim smugglers are using innovative ways to bring in the metal illegally.

Sometimes gold is melted into seed-shaped chips and hidden in dates from Dubai, or ground into granules and mixed with other metals to look like ore. The metal is also being converted into gold belt buckles and torch batteries.

The smuggling is becoming increasingly difficult to contain, admit regulators.

Officials from the Directorate of Revenue Intelligence say smugglers are regularly using the air route, taking advantage of airlines that club international routes with domestic ones using the same flight.

'Unprecedented'

First, carriers smuggle gold abroad and hide it in the aircraft, while another set of carriers board the same flight on the domestic route and walk away with the consignment.

"This is unprecedented and unbelievable. A new industry has emerged in India - it is a very dangerous situation," says Konal Doshi, a top official at the Gems and Jewellery Export Promotion Council (GJEPC), a Mumbai-based body of the Indian Commerce Ministry.

According to his figures, smuggling rose by almost 300% between March 2013 and April 2014.

Indians traditionally hoard gold in the belief it will bring financial security

Triggered by a rise in duty on imports of gold jewellery introduced in June last year, smuggled gold worth 2,500m rupees ($41.18m; £24.75m) was confiscated at various ports and airports between March and December last year, up from 500m rupees during the same period in the previous fiscal year.

Last year, the government hiked the import duty on gold three times, eventually to 15%, to curb demand for the precious metal and rein in a widening current account deficit that had touched a record high of $88bn (£53bn) in 2012-13.

A current account deficit is the difference between inflow and outflow of foreign currency and occurs when imports are greater than exports.

The government now expects the deficit to fall below $50bn in the current financial year, ending 31 March.

Gold imports, which had peaked at 162,000kg in May 2013, came down to 19,300kg in November after the government hiked the duty.

But the smuggling of gold, mainly from Dubai and Sharjah, where the metal is cheaper, is on the rise, authorities say.

The GJEPC has asked the finance ministry to slash the import duty on gold. Sonia Gandhi, the president of the ruling Congress party, has also written a letter to the commerce ministry seeking the removal of the curbs.

'Back to the 1990s'

But Delhi is not keen to cut the duty yet.

"At present, there is no proposal under consideration," Minister of State for Finance JD Seelam told parliament recently.

Over 85% of gold imports in India are in jewellery

The main opposition Bharatiya Janata Party says the government has reintroduced controls that were previously dropped by Congress in 1993 in order to curb smuggling and money laundering.

"But we are back to the 1990s. Gold is being smuggled in from our neighbouring countries," senior BJP member and former finance minister Yashwant Sinha says.

DRI officials admit that less than 1% of the contraband gold is confiscated by law enforcers.

"The move to increase import duty is not working. In India, everyone - even the poorest of the poor - invests in gold. This move can only work if all the smuggled gold is confiscated by the regulators," says economist Surjit Bhalla.

But that looks like a near impossible task.

Shantanu Guha Ray is a Delhi-based journalist