Must India Curb Gold Imports: Why It’s A Bad Idea

India imports 800 tons of the 2500 tons of gold produced each year. This creates pressures on the dollar-currency architecture of the modern world. What can India do to resist US pressures on this front?

Gold smuggling has gained a new life with higher import duties on gold to curb rising demand, according to Indian financial intelligence agencies | Graphic source & courtesy – economictimes.com

ourteen months ago, in December 2011, as the Western world took a break for Christmas, India and China took simultaneous actions to restrict demand gold in their respective markets.

Chindia in Tandem

China, till December 2011, was installing gold-ATMs to ramp up gold buying by its citizens.

Government of India (GoI) was tweaking policy (gold loans attracted zero-risk weightage in bank capital provisioning norms) to aid multi-billion corporations like Muthoot Finance to expand the gold-loans market.

And then the tune changed.

In India, the Prime Minster’s Economic Advisory Council (PMEAC) took a strident anti-gold stand. In the last 13 months, India has increased import tax by nearly 850% on gold – from a flat Rs.200/10 gm to 6% (roughly Rs.1700/10 gm at current prices & exchange rates).

In China, the Government cracked down on gold importers.

Dollar Drought

Three months before these concerted actions by India-China, in September-December 2011, as gold prices dropped from US$ 1900 to US$1600, global banking was seized by an acute dollar-scarcity.

Banks in Europe were raising money by using gold as collateral. India, the world’s largest importer of gold was particularly affected. The Indian rupee became Asia’s worst performing currency. India rushed to sign a US$15 billion of credit line from Japan.

China assured credit lines to some of its favored trading partners. Six months later, Africa got from China US$20 billion. Some US$10 billion of Chinese credit went to nations in Central and Eastern Europe and another US$10 billion to various Latin American countries came from China. Even before this, Chinese telecom firms made breakthroughs in Latin-America with credit.

A dollar-drought while the US was busy flooding the world with dollars?

A dollar shortage while Ben Bernanke is pumping trillions of dollars in the world economy?

As the difference increased in Indian and international gold prices, smuggling of gold too is making a comeback.

Gold Tail That Wags the US dollar?

In the last 18 months, any drop in gold prices favored the dollar in the dollar:rupee trade.

Any drop in dollar-price of gold has been coupled with an increase in dollar price against the rupee. As a result, Indians had to spend more rupees to buy gold that was worth fewer dollars.

Now, this is strange!

On a long-term basis, gold has no positive, negative, inverse, divergent, convergent correlation with any other commodity, or exchange-traded stock. So why this short-term coupling of rupee:dollar:gold.

Is there a central bank consensus, including(?) Reserve Bank Of India (RBI), that the Indian consumer should not benefit from price-drops in gold?

Trade Deficit … Anyone?

India’s current account deficit i.e., exports + inward remittances less imports = current account deficit (CAD), is running at less than 6% – up from less than 3% at the start of the Great Recession.

Exports to a world in the grip of the Great Recession have grown slowly while imports-increase into a growing Indian economy is faster. While the Indian CAD situation needs addressal, it is by no means alarming.

It is well-known and widely-accepted that vast sectors of the Indian economy are not measured or monitored by official statistics. Hence, Indian GDP is understated. It is not surprising that Indian GDP measured on a nominal basis (US$1.85 trillion) is less than 42% of the figure obtained when measured on the basis of purchasing power (US$4.46 trillion).

Indian Gold Imports

Keeping these factors in mind, a CAD that is higher by 2% of India’s nominal GDP means a gap of about US$35 billion – no large sum for the Indian economy. Anyway, since a large part of Indian imports is gold, it further reduces the cause and need for alarm.

Ostensibly, India’s CAD situation is due to gold, India’s second largest import, according to GoI. The Indian Government has targeted gold for its policy-intervention attention. Prima facie, US$60 billion gold imports cannot be the issue for a US$2 trillion economy. There are good reasons to believe that this policy intervention by the GoI is happening under US pressure – because Indian gold imports account for one-third of total mine production of gold in a year.

In the past …

The Indian Government’s “management” of the rupee-dollar till the 1970’s meant the rupee at a higher value. Over the 1980s and early nineties in a series of devaluations, Indian rupee’s over-valuation was corrected. Before that, there was a massive arbitrage opportunity between  official exchange-rates and a thriving black market.

A blogger who has been travelling to this part of the world writes

“…in 1969 a dollar fetched 13 rupees, although you could buy 28 rupees for a dollar in Switzerland and 40 rupees for a dollar in Kabul. The official exchange rate is now 38.50 rupees for a dollar, a nice deal”

This high rupee-value gave rise to an active black market in foreign exchange, supported by gold smuggling into India; drug transshipment out of India from the Golden Crescent and the Golden Triangle. This drug+gold trade spawned a huge crime wave of global proportions.

Artificial valuation of the rupee made exports uncompetitive; imports cheap – for which there was no foreign exchange. India regularly had meetings with AID India Consortium and elaborate cases for borrowings were made. The trade deficit remained.

Will things be different this time? I am sure that a few people in the Central Bank consensus group who think that this time, it will be different.

How serious is the smuggling problem?

Gold imports through Thailand have increased as India has a free trade agreement with Thailand that allows gold imports at !1% instead of 6% | Image source & courtesy – economictimes.indiatimes.com…

Why is the RBI Wrong?

RBI’s anti-gold policy is definitely misplaced.

Indian gold imports at 800+ tons are a cause of disequilibrium, with global production at some 2500 tons.

So be it.

India is at the receiving end of a bad deal in agricultural subsidies, foreign exchange reserves, technology imports, UN, IMF, World Bank – not to forget a bad deal in oil.

It is not like India controls global gold mines or production. Or is India in any position to stop other buyers from purchasing gold? Unfair apart, why must GoI + RBI take unilateral  steps to restrict gold imports into India?

Currency Printing: Like every other central bank in the world, the RBI also has been printing too many rupees. Unlike the rest of the world, Indian consumers have been sterilizing excessive printing of the Indian rupee by buying gold. This way, the market automatically sterilizes excess rupee liquidity.

More taxes is more profits for smugglers: The higher the difference between international prices and official prices, higher the profit margin for illegal imports.

In fact, raising of duty has only enhanced the profit margin of smugglers,” said a senior DRI official who did not want to be identified. (via Gold smuggling on the rise as imports turn costlier – Livemint).

“As of now, gold smuggling is limited to air passengers and carriers, which has limitations in terms of volume and cost. The bulk smuggling channels (by sea and land) have not revived, but the recent increase in customs duty will provide the profit differential to revive it,” said a senior customs official who too did not want to be identified due to the sensitivity of the issue. This person added that it would be impossible for enforcement agencies to contain smuggling through these routes. (via Gold smuggling on the rise as imports turn costlier – Livemint).

Trade Deficit: Is this increase in Customs likely to reduce India’s trade deficit? Unlikely. It will increase capital-flight to offshore financial centres – from where foreign-exchange earnings will get higher returns than in India. Higher customs or other barriers will mean more (and more) policy interventions that will increase compliance overload and reduce policy-impact.

If the proposed duties do indeed lead to more smuggling, though it would not appear in India’s balance sheet, it could continue to pressure the Indian rupee, which has been losing value against the U.S. dollar in recent months. (via Gold Smuggling Redux in India? – India Real Time – WSJ).

Questioning the anti-gold logic of the Govt apart, increasing customs duties from 2% to 6% will not change a 2000-yr of gold tradition | Graphic source & courtesy – economictimes.com

End of Bretton Woods: No fiat currency system has lasted for more than 75 years.

The Bretton-Woods system, pinned to the US dollar has morphed from a gold-based to an oil-based currency. In the last ten years, the petro-dollar surplus has decreased – and US debt has ballooned to US$17 trillion – 125% of US GDP. Add US consumer debt and corporate debt, and we are talking US debt at about 300% of US GDP.

Euro-Yuan Challenge: Euro-currency has not broken down. Not quite what Anglo-Saxon Media (ASM) has pushed us to believe. – in line with 2ndlook estimate of 2 years now. ASM also pushed the case of a Chinese hard-landing very hard. But the Chinese hard-landing is nowhere in sight. So, the Euro and Yuan are likely to increase their share in global trade. From nearly 90% of global trade, the US dollar share of trade has reduced to about 67%. As it gets close to 50%, (probably) in the next 7-10 years, we may see a greater role for gold as an objective cross-currency index. Gold trade will only increase in importance.

Rise Of The Underworld: Will we want to give the Indian narcotics-gold underworld a greater hold over the Indian economy – like it was 25 years ago. Like the narcotics-gold underworld dominates Pakistan or Afghanistan now.

Safety Net: In the face of global or local dislocations (due to drought, floods, earthquakes, war, epidemics) private gold reserves can help families to restart lives. Even without State support.

Much of the reason for Indian economic equilibrium over the last 65 years, has been the India’s private reserves of gold.

Let’s See Action

Covering a gap of US$35 billion means looking at three big targets of US$12 trillion each.

1. Increase oil refinery exports (set up two more Jamnagar type refineries), increase domestic crude output (split ONGC into four parts?) and shrink oil imports.

2. Fund 10,000 SMEs with credit for expansion and growth to add about US$12-US$15 trillion of output. Privatize city bus services and privatize train operations.

3. Sign a Third-World rupee-trade FTA, which will boost exports to the Third World by US$12 billion and replace dollar imports with rupee imports.

It is these measures which will yield answers to the Indian CAD problem – instead of curbs, taxes and barriers to gold imports.

But then …

What was on the Plate?

In October last year, the US Treasury Secretary, Timothy Geithner and the Chief of the US Federal Reserve were on a two-day India visit – en-route to Tokyo to attend some IMF and World Bank meetings.

Any bets on Geither and Bernanke’s main item on the India-visit agenda was gold?

Anyone?

The depth of the global gold market with a large Indian diaspora makes it easy to avoid excessive taxation – a short step from criminal smuggling. | Graphic source & courtesy – economictimes.com

Aww … another conspiracy theory?

John Hopkins University in Baltimore, Maryland, USA hosts since WWII the Warfare Analysis Laboratory – a part of its Applied Physics Lab. Used frequently by the Pentagon, in 2009, a unique war simulation was conducted here.

Not a nuclear or a conventional war, not even a biological or chemical war – but an economic and financial war. Simulating how an Economic Hit Man from other countries would operate, its effect on the US and the US response.

Two years after this simulation, one of the participants, James Rickards has published a book outlining some of the presumably basic models used in the exercize.

All these actions point towards a declining US using more desperate means to stay on top.

For how long?

Rising Chorus … Within and Without

All these points are well-known and understood within sections of GoI. By the Indian and global press.

Some extracts below.

Gold smuggling has acquired a new lustre with imposition of higher import duties on the yellow metal to curb rising demand, financial intelligence agencies have said, warning of a sudden resurgence of underworld activity.

Import duty on gold has risen from nil to 6% in the last 12 months. Incidents of smuggling have seen an upswing recently.

Officials in the finance ministry fear that return of gold smuggling will revive Mumbai’s underworld, which thrived on the practice until the economic liberalisation of the early 1990s.

They say a rise in the illegal gold imports will undermine the government’s strategy to curb gold imports to check a runaway rise in current account deficit, which touched a record high of 5.4% of GDP in the first half of 2012-13.

Some officials said the recent confiscations point to a growing trend of organised networks engaging “carriers”, who are paid between 10,000 and 25,000 for each trip. They said illegal transfer of gold has become more lucrative for these carriers since the hike in import duties, adding that many of them are now resorting to rectal smuggling.

Agencies also fear that smugglers may take to the sea route once again.The authorities say they have seized Rs165 crore worth of gold between April and December 2012, an 11-fold increase over the seizures in the year-ago period.

India, the world’s biggest consumer of gold, imported $56.4 billion worth of the metal in 2011-12, accounting for nearly half of its current account deficit.

The country has already imported gold worth $38 billion this fiscal, prompting the government to raise import duties again by 200 basis points to 6%. Current account deficit widened to a record 5.4% of GDP in the first half of 2012-13, with higher gold and crude oil imports increasing the country’s dependence on foreign capital inflows

via Financial intelligence agencies sound alert on gold smuggling – The Times of India.

Gold smugglers have stepped out of 1970s’ Bollywood potboilers into present day reality with the government raising taxes to curb the import of the yellow metal.

According to data from the Directorate of Revenue Intelligence (DRI), an agency that monitors economic offences, the incidence of gold smuggling in the current fiscal year has zoomed at least eight times compared with the corresponding period the previous year.

As the government struggles to rein in a raging current account deficit that is likely to cross 4% of the national economic output this fiscal, it has increased the import duty on the precious metal thrice since last year.

India’s gold imports, (are) next only to oil imports in terms of value.

The increase in import duty on gold has clearly led to a price differential between Indian and international gold, and that, in turn, has led to an increase in smuggling. Spot gold prices here are as much as 5.7% higher than in Dubai, compared with a difference of 0.1% in 2008. Typically, gold is smuggled into India from Dubai.

In the first 10 months of 2012-13, till January, DRI has seized gold worth Rs.60.17 crore (200kg at the current price of gold) and cracked 36 cases of smuggling. In the corresponding period in 2011-12, it had seized gold worth Rs.7.42 crore and cracked 15 cases.

To be sure, the number is almost insignificant when compared with the value of India’s gold imports—$38 billion (around Rs.2.03 trillion today) till December.

And it refers only to seizures and the gold smuggled into India could be much more; DRI officials admit that they detect about one in every 10 cases.

“The duty rate hike in phases, from Rs.100 per 10g to 6% (about Rs.1,800 at the current price) now, has not really dampened the demand. In fact, raising of duty has only enhanced the profit margin of smugglers,” said a senior DRI official who did not want to be identified.

While the government’s actions are intended at discouraging import of physical gold, DRI and customs officials say the recent 2 percentage point increase in the import duty on the precious metal will make it difficult for enforcement agencies to contain bulk gold smuggling in India.

On 22 January, India raised the import duty on gold to 6% from 4%.

After restrictions were lifted on gold imports and a few commercial banks were allowed to import gold and sell the yellow metal to jewellers and exporters in 1997, the spread between international and local market prices shrank dramatically, but with the rise in import duty, it is now widening.

Modus operandi

Explaining the modus operandi of gold smugglers, the DRI official said most of the smuggled gold is brought into India through air mostly from Dubai and Thailand, concealed in either cabin baggage or different parts of the body. People carrying this gold are called carriers, or mules, and they work in pairs. Going by the data collected by DRI, on average, each mule carries at least 5kg of gold per trip.

According to the DRI official, the return on investment for a smuggler in a year amounts to as much as 200% for such trips.

Here’s how the math works: At the current price, it costs Rs.1.44 crore to buy 5kg of gold in Dubai. The cost of an air ticket, hotel expenses and the commission of the mule plus hawala fees to send the money to Dubai after the gold is sold in India comes to another Rs.2 lakh. The same gold can be sold in Mumbai for Rs.1.51 crore, netting the smuggler Rs.5 lakh for a single trip.

Such an operation typically takes four days. Theoretically, this means a smuggler can churn his initial investment seven times a month. Over a year, that means a profit of Rs.4.2 crore on the original Rs.1.5 crore investment.

“As of now, gold smuggling is limited to air passengers and carriers, which has limitations in terms of volume and cost. The bulk smuggling channels (by sea and land) have not revived, but the recent increase in customs duty will provide the profit differential to revive it,” said a senior customs official who too did not want to be identified due to the sensitivity of the issue. This person added that it would be impossible for enforcement agencies to contain smuggling through these routes.

Customs officials also claim their job has been made tougher by a 2011 Supreme Court ruling under which individuals arrested for violating the Customs Act can be released on bail. The apex court’s decision, both officials mentioned above said, has taken away the powers of the customs department to deter smuggling.

via Gold smuggling on the rise as imports turn costlier – Livemint

For some, it’s almost Haji Mastan time again.

There has been a 10-fold increase in the number of gold smuggling cases in recent months. Between April and June this year, authorities impounded gold worth 940 crore in some 200 cases of smuggling, up 272% over the same period last year, finance ministry data shows.

Smugglers make money if they can successfully avoid paying duties – 4% customs duty and other taxes, which add 5%-plus to the landed cost of gold.

via Weak rupee makes gold smuggling, bets attractive – Economic Times.

An increase in the import duty on gold, the third in less than a year, is expected to lead to a rise in smuggling of the precious metal into the country. On Monday, the government hiked the import duty on gold from 4% to 6%.

Air customs officials speculate that more gold will be smuggled from abroad through airports as import duty is now at its steepest.

There has been an increase in smuggling of gold through Chennai from Sri Lanka, Singapore, Malaysia and other Southeast Asian countries over the past three years.

This is the third time the government has raised import duty on gold. In March 2012, the government doubled import duty on standard gold from 2% to 4%. In January 2012, it increased duty from 1% to 2%. Of the 800 tonnes of gold that India imports every year, one-fourth is accounted for by Tamil Nadu.

While customs officials are apprehensive that they will have to be on their toes, bullion traders are unhappy that high duty will push up attempts to smuggle in gold by evading taxes and will lead to loss of jobs for local goldsmiths.

Jewellers say smugglers, couriers and middleman can make as much as Rs 1,800 for every 10g of gold imported (6% of Rs 30,000).

“With imports of 50kg, the margins can be as high as Rs 1 crore,” said a jeweller who did not want to be named. Jewellers say the government has seized close to 900kg of unaccounted gold in the last year.

via Import duty hike to up gold smuggling – Times Of India.

Gold smuggling is not new to India; in fact, many villains of Bollywood movies in the late 1970s were often smugglers. One of the most memorable Bollywood smugglers was Lion (pronounced Loyan) played by actor Ajit in movies like Kalicharan and Yaadon Ki Baraat. Even superstar Ambitabh Bachchan was a smuggler in his blockbuster movie in 1975 Deewar.

“In the late 1980s and early 1990s, the price of gold in India was 65% higher than in other countries,” wrote Douglas Farah, a national security consultant in the U.S., in a paper in 2004.

Citing a report by Interpol from the mid-1990s, Mr. Farah said that gold worth $4.2 billion was smuggled into India in 1991.

In the early 1990s, as part of India’s economic liberalization, the Indian government removed the restrictions on importing gold.

This eventually helped lower the price gap between prices in India and abroad.

If the proposed duties do indeed lead to more smuggling, though it would not appear in India’s balance sheet, it could continue to pressure the Indian rupee, which has been losing value against the U.S. dollar in recent months.

via Gold Smuggling Redux in India? – India Real Time – WSJ.

The government has raised customs duty on gold in bid to curb imports that are largely responsible for the high current account deficit and weakening currency, but a spurt in smuggling threatens to undermine its efforts.

“The operation is currently on…there was intelligence on a sudden jump in gold jewellery imports from Thailand,” said an official with the organisation privy to the development.

India has a free trade agreement with Thailand that allows gold jewellery imports at a concessional customs duty of 1 per cent.

The duty rates for imports through normal channels are much higher after a steep increase in this year’s budget and goes up to 10 per cent on standard gold bars, gold coins and non-standard gold stand, making Thailand an attractive place for purchases.

Though, stringent rules of origin norms are in place in the FTA to ensure that any goods taking advantage of the concessional duty regime undergoes a substantial value addition in Thailand, DRI is alleging large-scale misuse of these norms by importers.

According to DRI sources, the rules of origin under the FTA envisage a value addition of up to 20 per cent but since gold rates in Thailand are at the same levels at India and value addition can only push up the cost of goods and render gold jewellery imports uncompetitive.

Customs authorities had impounded gold worth 942 crore in some 200 cases of smuggling bettween April and June this year, up 272 per cent on 243 crore corresponding period last fiscal that involved 20 cases.

via DRI cracks down on gold smuggling from Thailand – Economic Times.

Related Articles

• How Much Gold Does China Have?… (dailyreckoning.com)
• China remains top gold producer for sixth year (rediff.com)
• Turkey says won’t halt gold flow to Iran (en.trend.az)
• 10 things to know about gold duty hike (profit.ndtv.com)
• Hiking import duty on gold not a solution (thehindu.com)
• Forex reserves down by $595 mn to $295 bn (news.in.msn.com)
• Indian Central Bank Aims To Transfer Massive Physical Gold Into Banking System (sgtreport.com)
• Standard Bank Says Physical Gold Purchases Unusually High – Bloomberg (bloomberg.com)
• Impact Of A Proposed Tax Hike On India’s Gold Imports (seekingalpha.com)
• India Scrambles To Make Gold Purchases Ever More Difficult: Hikes Import Tax And Duties Again (zerohedge.com)

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Indian diplomacy: Heavy Lifting

Manmohan Singh, attacked at home with scandals and policy paralysis; internationally blamed for a placid Indian economy. No, I didn’t mean flaccid. In the middle of this has been a diplomatic triumph that he cannot talk about. But 2ndlook can …

An oil tanker loads gas in Assaluyeh seaport at the Persian Gulf, 1,400 km (870 miles) south of Tehran, Iran | May 27, 2006. | Credit: Reuters/Morteza Nikoubazl | Click for image.

Who’s knocking

It takes chutzpah to host US Secretary of State Hillary Clinton and a trade mission from Tehran on the same day. That’s what India is doing — and it has so far played the two sides off rather well. While good relations with the United States are important, Iran’s cheap oil is too attractive to pass up, and India has a long history of goodwill towards its Persian neighbour. A compromise looks likely.India has been publicly dismissive of US calls to stop doing business with Iran. Given its $185-billion trade deficit, it is not hard to see why New Delhi would rather keep trade flowing. Oil accounts for two-thirds of India’s import bill, and Iran is a major supplier. India has even been able to negotiate payment in its own currency, the rupee. That’s like a gift voucher which Tehran can only spend in Indian shops.

Clinton, meanwhile, has called for India to support US sanctions. But she can’t afford to push too hard.

Privately, the Indians seem to be more co-operative. Under pressure from politicians, refiners have cut imports of oil from Iran by 15-20 per cent. That strategy may be enough to win a waiver from US-led sanctions during Clinton’s two-day visit, assuming American politicians believe a quietly helpful India is better than an openly hostile one.

India’s best outcome would be to keep both sides happy. As Iran’s second largest customer, it is in a good position to secure a discount to the market price of oil —something it is unlikely to get from other suppliers like Saudi Arabia. And the United States may be prepared to bend its rules to keep an emerging superpower on-side. New Delhi’s diplomatic balancing act might just work. (via Tightrope diplomacy).

Jigsaw

And behind this heavy lifting, was a bigger story!

“The dispute over Iran’s nuclear programme is nothing more than a convenient excuse for the US to use threats to protect the ‘reserve currency’ status of the dollar,” the newspaper, which calls itself the voice of the Islamic Revolution, said.

“Recall that Saddam [Hussein] announced Iraq would no longer accept dollars for oil purchases in November 2000 and the US-Anglo invasion occurred in March 2003,” the Times continued. “Similarly, Iran opened its oil bourse in 2008, so it is a credit to Iranian negotiating ability that the ‘crisis’ has not come to a head long before now.”

Iran has the third-largest oil reserves in the world and pricing oil in currencies other than dollars is a provocative move aimed at Washington. If Iran switches to the non-dollar terms for its oil payments, there could be a new oil price that would be denominated in euro, yen or even the yuan or rupee.

India is already in talks with Iran over how it can pay for its oil in rupees.

Even more surprisingly, reports have suggested that India is even considering paying for its oil in gold bullion. However, it is more likely that the country will pay in rupees, a currency that is not freely convertible. (via Iran presses ahead with dollar attack – Telegraph).

This payment ‘crisis’ was triggered when

Barack Obama signed into effect the Iran Threat Reduction Act on December 31, 2011. That Act bars foreign banks from the US if they conducted transactions with the Central Bank of Iran (CBI), a move intended to choke off Iran’s oil incomes, its main source of revenue.

The law calls for US financial sanctions on anyone settling oil trades with CBI, and comes into effect from June 28. The exceptions are White House-blessed waivers or a very tight oil market. (via Why India’s real Iran dilemma isn’t oil – Economic Times).

Show me the money

The drama of payments to Iran played itself out over the last one year with many twists and turns:

• An ‘angry’ Iran threatening to cut oil supplies
• India ‘outraged’ and eager to pay, but without banking options
• US ‘determined’ and pressing India to cut oil purchases from Iran

With many rounds of shadow-boxing,

In December 2010, the Reserve Bank of India (RBI), fearing US sanctions on India’s financial sector, had walked out of the Asian Clearing Union that cleared Iran’s oil payments.

This started a merry-go-round as India scoured the world to pay Iran for its oil and simultaneously tried to reduce its dependence on Iranian oil. India began to use one of its small nationalised banks with little or no exposure to the West, to pay for the oil.

The first stop was Germany’s EIH Bank, but in a few months that stopped. Turkey’s Halkbank has been processing India’s payments to Iran since then, though there were palpitations when Halkbank refused a BPCL application. This week, Halkbank stated that it remained open for business for India. (via Why India’s real Iran dilemma isn’t oil – Economic Times).

To buffer India-Iran trade from external influences, India proposed a rupee payment system, which can be direct transaction without any third-party involvement.

Iran has asked India to pay for oil partly in yen as the two nations seek an agreement on how to maintain trade amid tightening global sanctions, according to three people with knowledge of the matter.At talks in Tehran last week, India proposed to pay its second-biggest oil supplier in rupees through a bank account in the South Asian nation. Iranian officials sought partial payment in yen because they’re concerned that they may not get sufficient value from the rupee, which isn’t fully convertible.

The nations have struggled to preserve $9.5 billion in annual crude trade. The Gulf nation is concerned that India’s entire crude oil bill can’t be paid through exports to Iran, the people said. Iran’s imports from India are worth about $2.5 billion a year, while its annual oil sales to the South Asian nation are valued at about $9.5 billion, the people said.

Iran also wants India to invest in non-strategic infrastructure projects in return for crude supplies, the people said. (via Iran Said to Seek Yen Payments From India for Oil Amid Sanctions – Businessweek).

India and Iran agreed to use the Indian rupee for oil-trade with Iran. On this development, Indian media reported,

Dismissing the possibility of US sanctions impacting India-Iran ties, Tehran on Tuesday announced that the two countries have worked out a new mechanism for oil payments, following which Indian energy firms will pay for 45 per cent of their crude oil imports from Iran in rupees and rest through barter and semi-barter system.

This mechanism for future payments was arrived at a meeting between officials of the two nations in Tehran in mid-January. India has cleared all oil payment dues till date.

“A suitable mechanism has been found out. All the money not paid by India last year has been paid,” Iranian envoy to India Syed Mehdi Nabizadeh said.

“This was the proposal by India and we accepted it. Both the sides are satisfied,” Nabizadeh said.

India is keen to use the new mechanism as it fears that the current payment route through Turkish bank may end due to fresh US sanctions.

The Iranian envoy said the two countries are looking at mechanisms for payment of the remaining 55 per cent.

Iran could increase its imports of goods from India to settle part of the payments, Nabizadeh said. Indian companies are also expected to invest in projects in Iran, such as developing oil and gas fields, extracting iron ore, building roads and railways and purchasing fertilisers. India could also export iron, steel, machinery, equipment, agricultural products like rice, and minerals to Iran that faces international sanctions.

Nabizadeh, however, ruled out gold as an option for oil payments. “Gold is not suitable,” he said. (via India resolves Iran oil payment issue : India News – India Today).

Hits and Misses

Rupee-trade would have another benefit for India. Indian demand for US dollars will reduce by about 4%-6%. Coincidentally, around the same time (December 2012), the dollar started appreciating against major currencies – except the yen. Rupee-trade is something that India and the former Soviet Union used effectively for more than 20 years. Prime Minister Manmohan Singh

discussed alternative financial conduits with Russian officials during his visit to Moscow in December. India, which got 11 percent of its crude imports from Iran last year, is exploring the option of making payments for Iranian crude through Russia’s Gazprombank OJSC, though no deal has been reached, three of the people said Jan. 9.

For Iran this rupee trade limits the usage of oil-sale realizations to purchases from India. Based on this Iran would limit oil sales to India – which it has done. This is possibly behind the fig-leaf of 11% cut in oil-purchases from Iran.

This is in the short-term. In the medium term, both countries are looking at ways forward that are not dependent on external players.

Amid talk of reducing crude imports from Iran, and barely a week after US secretary of state Hillary Clinton’s visit to India, Iranian President Mahmoud Ahmadinejad has called Prime Minister Manmohan Singh, urging him to expand bilateral ties in “different fields”.

India declared that it is reducing its dependence on any particular region for crude import – even if not under Washington’s pressure. Ahmadinejad spoke to Singh on Monday evening

In his conversation with Singh, Ahmadinejad insisted that bilateral cooperation between India and Iran would lead to considerable achievements for both nations. Singh responded that widening ties with Iran was on the basis of “national interests”.

In yet another sign that Iran is trying to reach out to India, despite the oil cut, government sources said Tehran was likely to send its foreign minister, Ali Akbar Salehi, soon to invite Singh for the 16th NAM summit to be held in Tehran in August and for bilateral talks with Ahmadinejad. (via Amid oil cuts, Ahmadinejad speed dials PM Manmohan Singh – Times Of India).

But before this was another bombshell – using adequate safeguards of ‘plausible deniability’. An Israeli website, ‘revealed’ that India had dropped an atomic bomb on the US dollar.

India would use gold to pay Iran for oil.

New Delhi: An Israeli website has suggested that India has agreed to pay Iran in gold for oil purchases, but Indian authorities have called the report “speculative”.

In an “exclusive report” on Jan 23 this year, the website, debka.com, quoted Iranian sources as saying that “India is the first buyer of Iranian oil to agree to pay for its purchases in gold instead of US dollars”.

However, Indian government officials said the report was “speculative” and hence did not merit any response. (via Gold for Iran oil report speculative: India – India News – IBNLive).

If gold usage became common to settle oil transactions, it would be the end of the Euro and the US dollar as we know it. US Govt. debt (US$15 trillion) is roughly equal to global trade and speculation in oil.  If that oil-trade started to get settled in gold,

• gold prices would appreciate (choose any number between 100%-500%)
• Global demand for US dollar would reduce by about US$ 10trillion-US$ 20trillion in 12-36 months.

All this serves or damages US interests. But, it serves no short-term Indian  interest to rock the boat.

So, what is driving Indian thinking and actions?

360 degrees

Is it an oil ‘shortage’?

India has been reducing oil imports from Iran, ever since Saudi Arabian King Abdullah’s January 2006 visit here. Iraq, which is rejoining the global oil market, is also a big oil source. Then there is Nigeria, though internal problems there may impact its capacities soon. Thus, there is unlikely to be an oil supply problem in the world, despite the IMF hyperventilating about a “supply shock”.

Between the Saudis, Iraqis, Libyans and Russians there is enough extra oil, close to 1 million bpd more oil may be coming from these producers alone. Besides, the 600,000 bpd that Iran currently sells to the EU will soon be free for countries with the nerve and muscle to ignore sanctions. (via Why India’s real Iran dilemma isn’t oil – Economic Times).

Unlike Iran, India does not harbor any ill-will against the US or the West. In which case why is India playing so hard?

But as a past sufferer of international sanctions, India, like China, fundamentally dislikes them. They end up penalising the poor citizen, but keep elites in business. We can expect that a further set of UN sanctions against Iran would die at the hands of China and Russia.

So, is the nuclearization of Iran a true story?

Iran though is determined to get a nuclear weapon, despite all it’s protestations to the contrary. In conversations with the Indian leadership, Iranians said they took away a couple of lessons from current events.

Muammar Gaddafi, who gave up his nuclear programme to the West, died in a “West-imposed” conflict. But North Korea’s Kims (the late father and the successor son) remain untouched despite them being serious nuclear bad boys. That, Iranians said, was because North Korea has the nuclear device. The world needs a different narrative if Iran has to be weaned away from its nuclear dreams.

In which case the next question is …

What has India gained?

First, let us look at how India looks with the US Axis.

The Barack Obama administration will be delighted that the sustained diplomatic and political pressure on India is finally bearing fruit. Meanwhile, a protagonist lurking in the shade is all excited – Saudi Arabia.

A mystery lingers. What did the Obama administration promise the Manmohan Singh government as quid pro quo? Manmohan most certainly sensitized US Secretary of State Hillary Clinton of India’s “wish list” during her recent hurried visit to hold consultations personally with him just ahead of the US-India Strategic Dialogue co-chaired by her, which is scheduled to convene in Washington.

Delhi has been under immense pressure from Washington to fall in line with the letter and spirit of the US’s sanctions on Iran over its nuclear program and curtail the sourcing of crude oil from Iran. (via Asia Times Online :: India dumps Iran, squeezes Obama).

What about Iran? How does Iran feel about this? One reading seems to suggest

India is shrewdly exploiting Iran’s current vulnerabilities. Thus, by taking advantage of the obstacles being put by the US on the Asian Clearing Union payment mechanism of India-Iran trade, New Delhi persuaded Tehran to accept a system of barter trade for up to 45% of its oil exports, which would effectively work as an export promotion drive for Indian companies in the Iranian market.

Iran accepted the deal grudgingly since it is keen to continue somehow or other with its longstanding relationship on oil with India through the present difficult corridor of time. The heart of the matter is, remove oil from the Iran-India relationship and it will atrophy to virtually nothing. Evidently, New Delhi has assessed that the relationship means more to Iran than to India at the moment.

Iranian President Mahmud Ahmadinejad telephoned Manmohan on Monday in an attempt to shore up the relationship. He stressed that Tehran sets no limits to the broadening of ties with India and that the traditional, historical relationship has been of a “brotherly” character and is assured of a “promising future”. Manmohan responded with a caveat that India attaches importance to ties with Iran and welcomes a broadening of relations with Iran “on the basis of national interests”.

There is some evidence that Tehran is also settling for a low-key relationship. Tehran parried repeated Indian attempts to schedule a visit by the secretary general of Iran’s Supreme National Security Council, Saeed Jalili, to New Delhi. Tehran estimates that the consultations are best scheduled when New Delhi is genuinely open to strategic engagement with Iran. (via Asia Times Online :: India dumps Iran, squeezes Obama).

To some the question remains

the big question still remains: What is it that India hopes to extract from the Obama administration in return for its momentous decision to comply with the US’s Iran sanctions?

Indian diplomacy is hard at work. Starting from 2006 when India began voting against Iran in the International Atomic Energy Agency, Iran has become a factor in the US-India strategic partnership and New Delhi has been able to leverage it because Washington is extremely sensitive to Iran’s regional standing.

Manmohan’s timing is superb. Although Obama needs to take a decision on giving a “waiver” to India under the Iran sanctions regime only in July, Manmohan took the decision now to cut India’s oil imports from Iran.

Clearly, New Delhi has set its sights on the forthcoming US-India Strategic Dialogue in early June. After having discussed with Clinton during her recent visit the future directions of the US-India strategic partnership, New Delhi expects a tradeoff.

Obama’s political prestige is at stake over the Iran nuclear issue, especially in a tricky presidential election year for him. Manmohan is handing over to him a major foreign policy “achievement” in making Tehran look somewhat more isolated in its region just when the talks over the Iran nuclear issue are moving into a crucial phase.

If Indian diplomats are worth their salt, they are tiptoeing toward the US-India Strategic Dialogue with a killer instinct; they won’t settle for some two-penny worth gains. (via Asia Times Online :: India dumps Iran, squeezes Obama).

Why is Iran so important to India.

Iran is a counter-balance to the anti-India axis of China-Pakistan. Pakistan would be hard-pressed to fight a war against India alone. If aided by China, India could play the Iran card. What is in it for Iran?

Why would Iran do it?

Historically, at times Iran has ruled over modern Baluchistan and parts of Afghanistan. These territorial ambitions of Iran would become reality. Iran would justify the annexation to protect the Shia Muslims of Pakistan of a ‘crumbling Pakistan’.

Just months before the outbreak of the 1857 War against the British, both Iran and Afghan rulers had been negotiated into neutrality by the British. So, while the British Raj was fighting for its empire, and India for its freedom, was alone.

Possibly, this lesson has not been lost on Indian diplomats.

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Related articles

• India considers wheat exports to sanctions-hit Iran (dawn.com)
• IAEA chief arrives in Iran for nuclear talks (guardian.co.uk)
• Read all the signs, wait it out on Iran – Times of India (timesofindia.indiatimes.com)
• Lift sanctions, Iran tells West ahead of nuclear talks (dawn.com)
• US keeps India waiting on Iran sanctions waiver (arabnews.com)
• Iranian traders to visit India as Clinton arrives (dawn.com)
• US wants to steer oil-thirsty India away from Iran (sfgate.com)

Death of Indian Shipbuilding

Bengal, which Mughal rulers described as paradise on earth, became a hell on earth during the British Raj. Right from the Famine of 1765 to the 1943 Great Bengal Famine which killed at least 3-4 million..

Note: Read 'f' as 's', where needed. | From: The ... report from the Select Committee of the House of Commons on the Affairs of the East India Company (Google eBook) | Published in Great Britain | Author: Select Committee on the Affairs of the East India Company, East India Company (London) | Publisher: Cambray | Year: 1810

Gunpowder capital of the world

After the Battle of Plassey (1757), the British gained control of Bengal – which was India’s major industrial centre. For the British, the most valuable product from Bengal was saltpetre – nitrate, the essential ingredient in gunpowder.

In 1757, right up to WWI, India manufactured more nitrate (essential for gunpowder manufacture) than the rest of the world put together. An intricate technology, no other country in the world manufactured gunpowder products, as much as India, of such good quality. For the British, Bengal’s gunpowder production was the passport to a world empire.

Gunpowder apart, Bengal was a major textile centre, famous for shipbuilding and a significant agricultural centre.

Lockstep in Bengal

Between 1757 and the Battle of Buxar (1765), the British moved step at a time, to tighten their grip on Bengal.

One of the first steps was to create a famine. After Buxar for the next two hundred years, the Bengal region started witnessing famines that continued upto 1943, when some 30-40 lakhs Indians died in Bengal (3-4 million).

Bengal which was intricately connected by thousands of kilometres of waterways and canals, had lakhs of boats plying up and down the region. In 1788 came the order that killed shipbuilding in Bengal. Today it may seem fantastic, but more than 20 different types of boats, were used. Each of them built for different use.

Chronicles of India

In the eighteenth and nineteenth century, wonder-stuck Europeans spent years making etching and woodcuts, that are today the main surviving record of that age gone by.

The Mughals built the world’s largest treasury of the world – and even after that, India was a major economic power. After the end of Mughal power in 1857, in the next 100 years of the British Raj, we see India become a starving, naked and homeless population.

And in the last 65 years, India has again become the fourth largest economy in the world.

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Gold drops over $77, posts monthly loss

As gold prices recovered from December lows, to 3-month highs, there was ‘news’ that ‘someone’ dumped some gold. No surprise.

On February 29th, 2012

Gold advanced to a three-month high and silver posted its biggest gain in eight weeks as investors bought precious metals as an alternative to a weakening dollar. Platinum and palladium also rose.

Gold futures for April delivery advanced 0.8 percent to settle at $1,788.40 an ounce at 1:30 p.m. on the Comex in New York, after climbing to $1,792.70, the highest level for a most- active contract since Nov. 14.

Prices are up 14 percent this year after a 10 percent increase in 2011, the 11th consecutive annual gain, as investors sought to diversify from equities and some currencies. The dollar index has declined 1.2 percent this month while gold advanced 2.8 percent. (via Gold Leads Precious Metals Rally on Investor Demand for Dollar Alternative – Bloomberg).

And the next day, on March 1st, 2012

Gold fell 5% to below $1,690 an ounce on Wednesday for its biggest one-day drop in more than three years.

Gold fell nearly $100 and silver was down $3 from session highs. Losses started to snowball at (2030 IST).

Trading volume exploded when speculation about an unusually large sell-order ran rampant. Option traders said funds were heavy buyers of puts to protect against further losses.

Wednesday’s sell-off wiped out gold’s gains from earlier in February, and the metal ended the month with a 2.5% loss for its second decline in three months.

Earlier in the session, bullion touched a 3-1/2 month high at $1,790.30 after the European Central Bank completed offering cheap loans worth over half a trillion euros to banks.

Spot gold fell below its 150-day moving average for the first time in a month.

Analysts said the next important resistance level is $1,650 an ounce, where the metal found support during its last sell-off in late January.

Funds were heavy buyers of December $1,500 put options as some looked to profit and others tried to protect further downside risks in futures, said Jonathan Jossen, a COMEX gold options floor trader. (via Nymex gold down 5%, biggest 1-day drop in 3 yrs).

It was said that

in afternoon dealings, gold was also hit “by a large sell order on Comex, said to have been 1 million ounces (or 31 tonnes) prompted by the Bernanke testimony,” said Ross Norman, chief executive officer at London-based bullion broker Sharps Pixley. (via Gold drops over $77, posts monthly loss – Metals Stocks – MarketWatch).

Mainstream press manufactured some explanation.

Financial journalists were quick to talk about the “disappointment” that Bernanke didn’t discuss detailed plans for QE3, but that doesn’t make much sense. This bullish pattern was not unfolding merely on speculation that QE3 was imminent. There just really wasn’t anything all that remarkable from the Fed chairman on Wednesday, and certainly nothing to trigger this type of sell-off.

The Wall Street Journal ran a story called “Market Roiling Trade Likely Not ‘Fat-Finger’ Error” that discussed how an order to sell 100,000 treasury futures hit the market just minutes after Bernanke started speaking. This could have caused a cascade effect that knocked other algorithmic and high-frequency trading platforms into chaos, including programs linked to currencies, and therefore, to gold.

There was also a rumor that JP Morgan sold — shorted? — a million ounces of gold all at once for an Asian fund, which is 10,000 futures contracts. That is a HUGE order, and that kind of size just cannot be readily absorbed by the gold market. I’m not a gold conspiracy theorist, but it does make you wonder after this type of sudden drop.

One of the really interesting things about Wednesday was how the carnage was for the most part limited to gold and silver. (via Fractal Gold Report: Flash Crash).

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Gold Prices – Blip, Dip or Flip

Why are gold prices going down?

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Euro-bank Crisis. Is it over?

Will the rescue effort by the European Central Bank (ECB), the Longer-Term Refinancing Operation (LTRO) help?

Euro-zone countries, coming under a debt cloud, fall like nine pins. | Cartoonist - Bruce Beattie; on 24th Nov. 2010; source & courtesy - cagle.com| Click for larger source image.

Two years after

After The Great Recession hit the US economy with gale force, it was the turn of the Euro-Zone areas to face the brunt of this recessionary typhoon. Starting with Iceland and Ireland, it soon spread to Greece, Spain, Portugal, and ominously, Italy.

With European banks highly exposed to debt issued by distressed European Governments, it seemed that the European banks could go under. Needing about a trillion dollars, EU spent much time wrangling about the rescue plan – the who-and-how of the bailouts. Decisive Christmas actions by the European Central Bank (ECB), patterned on the lines of the US TARP and QE actions, the Longer-Term Refinancing Operation (LTRO)  …

created a buzz.

But questions remain

Will LTRO stabilize the European banking, even if it will not generate growth? Will it blow away the clouds hanging over the EU banking industry?

The first major development occurred on December 8. The European Central Bank (ECB) declared that it will offer unlimited liquidity to European banks for 36 months. To access that liquidity, the banks need to post appropriate collateral. The “appropriate collateral” by my reckoning includes the sovereign debt of Italy and Spain. This is important, because the large European banks — especially in France — are having very serious and possibly existential problems with their liquidity. Fears of potential default are making it unusually difficult for them to access overnight and other short-term lines of credit to finance their balance sheets. That constrains their abilities to provide credit to clients and meet their commitments.

Without the ECB’s new policy, euro-zone businesses face the prospect of grinding to a halt. Inventories are difficult to finance. Payrolls might not be met. Taxes might not be paid. Now, with unlimited liquidity available from the Central Bank, that credit crunch should be history. We saw the same relief from a very similar U.S. credit crisis in 2008 when the Federal Reserve Bank agreed to accept many kinds of collateral from its member banks for unlimited funding. The fact that the largest U.S. banks are still standing demonstrates that this policy can be effective.

Today, we had our first look at the results of that policy as this ECB financing operation was launched. It opened its window and loaned $641 million (errata: an alert 2ndlook reader points out that the correct figure is US$641 billions – and not millions) for three years at 1% annually to 523 European banks . The size of the refinancing was greater than expected. It is noteworthy that the program went smoothly. It demonstrated to the global financial community that the European banks not only have access to liquidity at very favorable interest rates — far better than the rates available on the private markets.

The second major development occurred on December 5. After months of being the “bad guys” to the rest of Europe on the issue of who should share the pain of the sovereign debt debacle, Angela Merkel, German Chancellor, agreed to align with the majority of the euro zone. Germany no longer insists that private sector investors bear the losses on their balance sheets as sovereign debt is written down. Instead, it appears that the governments will likely now shoulder the cost of buying bonds or doing what it takes to manage the problem.

Exactly how and when the sovereign debt issues will be resolved is still unclear. But at least a major impediment has been removed.

With these two major developments, I would expect the capital markets to breathe a sigh of relief. The liquidity and solvency issues surrounding the European financial system are finally seriously being addressed. Of course, the devil will be in the details. (via Is the euro-crisis over? – MarketWatch).

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