Gold import control - Does it work?

The Govt. thinks that gold imports cause high Current Account Deficit (CAD), and therefore, gold imports should be curbed.  As outright ban on gold imports would create uproar, Govt tried doing it in a roundabout way, with mixed results. 

RBI came out with this circular in August 2013. The circular says that any importer of Gold has to keep 20% of such imported gold reserved for exports. In effect, the gold importer has to supply this gold to an exporter,who would in turn export it out of the country. The 20% is to be kept in bonded warehouses with Customs till an exporter is found. The remaining 80% can be sold in domestic market. However, if the 20% kept with customs is not subsequently exported, the importer cannot import further. The RBI circular presents a worked example on this. Also, if only a part of that 20% is exported, the quota allowed for imports in the next lot shall decrease proportionately. 

The circular was supposed to decrease the import of gold. What it did, was to stop imports completely into the domestic market for some time. The field formation of customs department didn't know how to go about, given the language of the circular, and stopped all import gold consignments till CBEC came up with their own notification to supplement the RBI circular, in september. Here's the link.
However,the language of the circular makes it amply clear that the Govt. doesn't want any imports of gold into domestic market. They have excluded the premier trading houses, nominated agencies, SEZs/EOUs from being counted as exporters.
It has worked. The gold imports have come down drastically. The import of around 3.5 Billion USD since mid of this year of gold (compared to around 18 billion USD last year for the same period), is proof enough. Most of even this imported gold has gone for exports as it was imported against advance licenses for duty free clearances for exports. So, in effect, there is hardly any raw gold in domestic market at the time of this posting.
Does that mean the jewellers are not making jewellery? No. They are getting smuggled gold which is commanding a premium of around 20% (10% duty saved + 10% smuggling costs). The premium is going up every day.
Does the CAD look good. Yes. On paper it does. But is it sustainable? That's moot. Because it's hard to believe that people have stopped importing due to these circulars. I believe that smuggling is back. And the payment is happening through hawala. Ajay shah elaborates on CAD here.
The small amount of gold imports for exports purposes is by premier trading houses such as Rajesh Exports Limited (in Bangalore). Such imports are happening through advance authorizations issued by DGFT. There's an RBI circular that covers it here.

So, in short, gold import for domestic consumption through legal channel is out. Gold imports for exports through legal channel is allowed and is being used by some big names in the field. Gold smuggling is on. And we don't know how the payments are routed through hawala. Is it hitting remittances, or is it being done through exports/imports misinvoicing or through services misinvoicing, only time may tell.

What I fail to understand is the rationale of such moves. Is the govt. serious when it thinks that a pseudo-ban would lead to drop in gold demand/consumption? With an open current account, isn't the govt joking when it thinks about curbing capital account issues arising out of gold smuggling?

Are there any lessons learnt? I bet there would be, in future, if this continues for long. And it would be simple. Such nonsense doesn't work, anymore.

Trivia: A recent flight from Dubai to Kozhikode had around 60 passengers carrying around 1 kg of gold each. As per the rules, a passenger returning from abroad after a continuous stay of more than 6 months can carry upto 1 kg of gold with them. Customs collected 10% duty from all these passengers. Upon interviewing passengers, it was found that someone from Dubai sponsored their tickets for this service. Free tickets for this carrier service. Not a bad deal! However, this import is not logged into the data capturing system of customs. I hear that more than a tonne of gold came this route last month. Customs reported multiple cases of gold smuggling recently, and if we add undetected cases, one has to be naive to believe that gold imports has stopped. 

Further updated blog on this topic here.