India gold smuggling rises on import curbs

Avantika Chilkoti
Getty Images

India is suffering a renewed spate of gold smuggling at the start of the annual festive period, which traditionally prompts a spike in demand, as import restrictions continue to throttle official inflows of the yellow metal.

Customs officials say seizures have jumped in recent weeks in advance of the festival season, which will reach its peak around Diwali in late October, while smugglers find ever more imaginative means of hiding undeclared gold.

The World Gold Council, a trade body, estimates that some 200 tons of gold will be smuggled into India during this calendar year.

Read MoreIndia uncovers new gold smuggling route

"If you compare it [smuggling] with last month, it has gone up," said Arvind Singh, who works in customs at Mumbai's international airport. "They might have changed their mode of smuggling because customs people are screening 100 per cent of bags on sensitive flights."

India introduced tough duties and quantitative restrictions on gold imports last year as part of a plan to reduce the country's current account deficit following a currency crisis that saw a sharp drop in the value of the rupee.

Many analysts expected these restrictions to be gradually removed as India's current account deficit fell sharply over the course of this year.

The government of recently elected prime minister Narendra Modi surprised the industry, however, by keeping policies unchanged inits maiden budget in July.

Read MoreDoes the Modi euphoria have a sell-by date?

India's gold and jewelry industry has long petitioned New Delhi to remove the curbs, but analysts say big changes are not likely in the near future.

How Modi could boost India's gold demand

"I think the government has taken its call," said Kishore Narne,commodities analyst at Motilal Oswal, a Mumbai-based brokerage, explaining that New Delhi is focused squarely on the country's external balances. "Until and unless they see any significant threat to the domestic security as far as gold smuggling or illegal gold is concerned, they will not relax the norms."

New figures released on Monday showed the continuing impact of restrictions on official imports, which dropped to $7 billion in the three months to June, down from $16.5 billion in the same period a year earlier, when imports jumped on a sharp drop in global gold prices.

Demand is also set to rise in the coming months during the wedding season and a string of religious festivals, when it is considered auspicious to buy the precious metal.

Read MoreIndia in 2020: the factory of the world?

"I think we should have a very good season of buying," says Ashok Minawala, former chairman of the All India Gems and Jewelry Trade Federation, who estimates that India's monthly demand for gold rises from between 40 to 50 tons, to 60 tons during peak season. "This is a booming economy at the end of the day."

Until and unless they see any significant threat to the domestic security as far as gold smuggling or illegal gold is concerned, they will not relax the norms.

India remains an important part of the global market, overtaking China to become the world's largest buyer of gold once again in the second quarter.

More from the Financial Times:

China fraud unit questions Morgan Stanley
Google hires top quantum computing expert
Fed steps up search for Libor alternative

Domestic supply pressures on the metal have eased slightly since May, when the Reserve Bank of India announced that certain trading houses would be allowed to import gold.

The premium on the yellow metal – the added price traders in India are willing to pay above the global price, once various duties are accounted for – has fallen to $30 per ounce from some $150 in the middle of last year, according to Mr Narne. On Wednesday, spot gold traded $1,266.60 an ounce – little changed from the previous day's close.

Buying in rural India may be subdued following a poor monsoon as agricultural output is hit, but consumer sentiment has picked up more widely since Narendra Modi and his pro-business government won a strong majority in the general election this May.