Hawala premiums double as gold smuggling zooms

Gold imports through official channels may have come down sharply, but it’s boom time for smugglers.

In the past couple of months, hawala premiums have doubled to 2.5-2.8 per cent, as unofficial gold imports this calendar year are likely to be at least 50 per cent more than in 2012.

Around Diwali, the premiums had gone up to as much as 3.5 per cent.

According to GFMS Thomson Reuters estimates, 100 tonnes of the yellow metal had been smuggled into the country last year.

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The hawala market, which trades in currencies unofficially, is also referred to as currency smuggling.

The market is used only for financing illegal deals in the country or outside it.

Earlier, gold smuggling was done only by those siphoning funds outside the country or bringing money into it by avoiding the tax net.

Indian employees working abroad were major participants, as banks usually kept huge margins.

For example, if the rupee value is 62 a dollar, banks would give Indian receivers only Rs 61 or so for every dollar.

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But if the same money is sent through hawala, Indian receivers get more than Rs 63. These days, they receive around Rs 63.50 for every dollar.

Trade sources say the hawala market has traditionally been used by the unorganised players in diamond business.

Since two per cent import duty is charged on polished diamonds, hawala premiums have remained under control -- any surge in premiums will mean part of polished diamond exports shifting to the unofficial route, resulting in round-tripping.

An official with an investigating agency says: “Gold has been in big demand in the hawala market in the past year; this demand is only rising.

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“However, the illegal market is also becoming competitive.

“With new demand, new channels of supply are coming up and keeping hawala premiums under check, but these are still at elevated levels.”

According to officials of investigating agencies and very conservative estimates from trade circles, the current size of the hawala market would easily be $20-25 billion.

Over-invoicing of imports and under-invoicing of exports are the most usual practices for financing demand for hawala.

A person aware of the hawala market operations said the good times for hawala operators would most certainly continue till, at least, the general elections next year.

There is no hope that import duty on gold (10.3 per cent at present) would be lowered before that.

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Hawala funds might even be used to cover campaigning costs.

In one-and-a-half years beginning January 2012, the government has increased the import duty on gold from one per cent to 10 per cent; along with cess, it comes to 10.3 per cent. These have improved margins and the risk-return ratio in favour of hawala dealers, operating mostly out of Dubai.

GOLD IMPORTS DOWN, BUT. . .

• 2.5-2.8%: Hawala premiums at present (up from 1-1.25% two years ago)
• $5-8 bn: Annual additional demand to finance gold smuggling
• 10.3%: Import duty on gold at present (up from 1% in January 2012)
• $20-25 bn: Estimated hawala transactions in a year

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