Recent Changes in India’s Bullion Market May Reduce Supply Chain Flexibility

India’s bullion market is going through a strategic shift with nearly all of India’s silver imports now managed by a select group of private players and these entities channel white metal from Dubai through the Gift City exchange in Gandhinagar, Gujarat. This channeling is anticipated to cause substantial revenue losses for the Indian exchequer over time.

A recent report by the Global Trade Research Initiative (GTRI) has highlighted that in May 2024, a staggering 87% of India’s global silver imports originated from Dubai, facilitated through the Gift City exchange. This new route has overshadowed traditional import channels, primarily due to a reduced 8% import duty on silver from Dubai, a stark contrast to the 15% duty imposed on imports through other ports.

This shift has not gone unnoticed by industry watchdogs. GTRI has called for an investigation into the relationships between export and import firms to unearth any potential conflicts of interest. The think tank warns that the current trend in the silver market could soon extend to other precious metals like gold, platinum, and diamonds, potentially disrupting established import practices and market dynamics.

The current concentration through Gift City could lead to increased vulnerability due to reliance on a single entry point. It increases the risk of supply chain disruptions due to geopolitical tensions, regulatory changes, or logistical bottlenecks at the Gift City exchange. Moreover, the concentration of import activities among a few players might stifle competition, leading to potential monopolistic practices that could affect pricing and availability.

Attempts by certain banks to import silver from the UAE through other Indian ports faced scrutiny over compliance with the rules of origin specified in the India-UAE Comprehensive Economic Partnership Agreement (CEPA). GTRI’s report precisely raises questions about adherence to EXIM policies, and legitimacy of the imports processed through Gift City, despite the same Dubai-based suppliers potentially being involved in both cases.

“The key concern is how the imports cleared through Gift City meet the rules of origin requirements specified in the India-UAE CEPA when importers from other ports fail to meet these,” the GTRI report noted.

India currently imposes a 15% import duty on silver, permitting only institutions nominated by the RBI and the Directorate General of Foreign Trade (DGFT) to import the precious metal. However, the Gift City exchange allows private traders to import silver without such restrictions and has not encountered the rules of origin issues flagged by customs authorities elsewhere.

Under the CEPA signed in 2022, India agreed to gradually reduce the duty on silver imports to 0% over 10 years, contingent on Dubai exporters meeting the rules of origin conditions. As the tariff becomes zero over the next eight years, all silver imports will likely come from the UAE, resulting in a revenue loss of ₹6,700 crore. This trade is driven solely by the tariff arbitrage offered by India.

From an operational standpoint, the concentration of silver imports through a single exchange impacts logistics and supply chain operations in the form of port congestion as well as reduced overall flexibility.

To address these concerns, GTRI has proposed several measures, including renegotiating the CEPA terms to eliminate the duty arbitrage, enforcing stricter checks on Dubai exporters’ value addition claims by the Gift City exchange, and conducting a thorough investigation into the relationships between export and import firms to identify and address potential conflicts of interest or familial ties. The think tank also recommended restricting silver imports to agencies nominated by the RBI and DGFT to minimize the risk of mis-declared imports.

The centralization of silver imports through the Gift City exchange represents a significant change in India’s bullion market. As the nation grapples with the financial implications and potential regulatory loopholes, the outcome of the proposed investigations and policy reforms will be crucial in shaping the future dynamics of precious metal imports in India.

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