Easy gold-buying will hurt economy

The relaxation of the ‘Know Your Customer’ norms for purchase of jewellery, announced just before Dhanteras, which is considered an auspicious day for such purchases, and Diwali, has raised questions about the Narendra Modi government’s claimed commitment to the fight against black money. In August, the government had made the production of Aadhaar and PAN cards mandatory for purchase of jewellery worth Rs 50,000 and more. It was claimed that this was to deter use of black money for the purchase of gold. But in less than two months, the exception limit was raised to Rs 2 lakh. Most of the complaints about the low limit had come from the jewellery lobby. Jewellers' bodies had reported that sales had come down after the August order. According to reports, sales increased and went much beyond last year’s levels after the norms were relaxed. No-one actually benefitted by the raising of the limit, except the jewellery lobby, which is especially strong in Gujarat, which is going to elections next month.

There was no convincing reason for the relaxation of the norms. Genuine buyers would not have been inconvenienced or deterred by the need to abide by the KYC norms. But gems and gold attract black money on a large scale. The raising of the limit would have helped those who wanted to use unaccounted cash for gold purchase without the fear of being traced and asked questions about the source of the money. The figures of gold sales show this. The limit was raised in August under the Prevention of Money Laundering Act (PMLA) with the claim that it would curb money laundering and generation and deployment of black money. The reversal of the decision was, therefore, a retrograde, politically motivated, measure. The aim of discouraging purchase and consumption of gold has taken a knock.

The decision was bad for another reason, too. Gold imports exert pressure on the overall trade balance because gold is the second largest import item after oil. Imports have steadily increased every year. In the first five months of this financial year, gold imports saw a 200% increase over the same period last year. After the August order, which set the exemption limit at Rs 50,000, the imports fell by 40% in September. But the October imports are said to have gone back to the old levels after the relaxation of the KYC norm. With the current account deficit (CAD) at a four-year high, this will hurt the economy badly. The government should restore the August KYC norm and stick to its decision in the interest of the health of the economy.