The Indian government has announced more restrictions on the imports of silver – one of a series of actions to reduce India’s overall import expenditure and regulate inbound precious metals in order to preserve the country’s foreign exchange reserves. The new restrictions immediately follow a substantial increase in customs duties on gold and silver imports from 6% to 15% by the government in New Delhi.
India Tightens Curbs on Silver Imports
In a notification issued by the Directorate General of Foreign Trade (DGFT), the importation of various types of silver products, including silver bars and semi-manufactured forms of silver, will now be placed in the “restricted” category instead of being classified as being in the “free” category (under the Reserve Bank of India guidelines). As a result, any importation of these products will require an import licence to bring them in.
What do the New Rules cover?
The new restricted imports cover silver (bars and powder) of all forms having a purity of 99.9% plus, as well as all types of silver, including silver-plated with platinum or gold. Previously, these products could be imported freely, so long as they complied with Reserve Bank of India regulations. Under the new regulations, any importation will require government approval prior to the shipment entering India. Officials indicate these new restrictions are effective immediately.
Authorities in India took action against gold imports as they are trying to stem the flow of bullion into India. To this end, the government has raised import regulations for non-advanced metals and strict limits on domestic non-advanced metal imports apply under the Advance Authorisation scheme for jewellery exporters.
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Background on India’s Silver Trade
India consumes a massive amount of silver each year, far surpassing other countries in total consumption. In fact, more than 80 per cent of India’s silver is imported to satisfy local demand for the metal.
The goal of the government is to alleviate pressure on the current account and protect foreign exchange reserves at a time of rising crude oil prices and economic instability caused by geopolitical tensions around the world. Officials are attempting to assist the rupee as it has been decreasing in value due to external factors over the past several months.
India’s silver import bill has increased significantly in 2010-11 to nearly $12 billion from approximately $4.8 billion in 2009-10. Furthermore, silver imports reportedly rose by more than 150 per cent year-on-year in the month of April alone, which has alarmed government officials.
The government argues that limiting non-essential imports like bullion will help limit outflows of foreign currency and stabilise the external sector.
Impact on Domestic Market
According to industry experts, the tightening of the restrictions will create shortages of domestic silver and increase premiums on local silver.
In terms of potential impacts on the market for silver, if the licensing process slows imports and reduces immediate availability, then traders and jewellery makers may be faced with higher costs.
Jewellery, coins and bars are using silver extensively. In addition, the majority of the industries that use silver for manufacturing and industrial purposes are the solar, electronic and electrical industries. Therefore, any disruption in supply will affect many industries.
Additionally, market participants are also concerned that increased duties and tighter restrictions on imports will result in a rise in unofficial imports and smuggling, similar to trends that have been present in previous periods where elevated import taxes have impacted the market.
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Global Implications
As a major source of silver purchases worldwide, if there is a significant reduction in imports into India, it will have a significant impact on global silver demand. Analysts expect that decreased demand from India will have a downward pressure on global silver prices, while increased domestic prices in India will be due to supply shortages.
Meanwhile, demand for physical and ETF investments in silver remains high in India, given the current uncertainty and turbulence in the current financial markets, many investors are continuing to view precious metals as a safe-haven investment.
The government’s latest policy measures indicate that the government will continue to maintain a very aggressive approach towards import of precious metals.
