On Monday, Union Law Minister and BJP leader Ravi Shankar Prasad alleged the 80:20 (gold import) Scheme that was introduced by the UPA government in August 2013 under the leadership of former Prime Minister Manmohan Singh and then Finance Minister P Chidambaram, was designed to help jewellers such as Nirav Modi and Mehul Choksi. Last week, a sub-committee of the Public Accounts Committee (PAC), a panel of parliamentarians who audit the revenues and expenditures of the union government, discussed a CAG report published in 2016 that found the scheme had resulted in a loss of over Rs 1 lakh crore to the exchequer.
What was the 80:20 scheme?
The scheme was introduced in August 2013 to curb the import of gold. During this period, the country’s macroeconomic indicators, especially the current account deficit (the excess of imports over exports), were weak. While 80% of gold imports under the scheme (India is one of the biggest importers of gold globally) could be sold in the country, at least 20% of imports had to be exported before importers could bring in new consignments. The permission to import the next lot was to be given upon the fulfillment of the export obligation. The policy aimed to discourage gold imports to rein in the widening current account deficit.
Why was the scheme introduced?
The UPA government was worried about the rising gold import and its impact on the current account deficit, which stood at $88 billion or 4.7% of GDP in 2012-13. Such a situation posed a risk of capital outflows and further weakening of the rupee, which was already under attack from speculators. The Reserve Bank of India, then headed by D Subbarao, and the Centre worked out measures to stabilise the rupee and lower the current account deficit. In August 2013, the rupee fell by 3.7% to an all-time low of 68.85 (against the USD), its biggest single-day loss since October 1995. High crude oil prices (close to $111 per barrel in August 2013) and a huge gold import bill forced the authorities to implement preventive measures. The 80:20 scheme helped in slowing down gold imports. Subsequently, the rupee recovered after the RBI, then led by Raghuram Rajan, announced a slew of measures to boost inflows and stabilise the currency.
Why were the rules eased in May 2014?
The 80:20 scheme was relaxed in May 2014 by the RBI at the behest of the Finance Ministry. Jewellers, bullion dealers, authorised dealer banks and trade bodies had approached the Ministry requesting a relaxation of the policy. The curbs were eased after crude oil prices dropped to a four-year low. The easing of rules allowed more agencies to import gold. In its May 21, 2014 review, the central bank allowed star and premier export houses to import the yellow metal subject to some restrictions. Six to seven private sector trading firms were also permitted to import gold under the scheme. These private firms accounted for 40% of the total gold imports in April-September that year. Initially, only state-owned banks and firms were permitted to import gold. These banks and their nominated agencies were allowed to provide gold loans for domestic use to jewellers and bullion traders. These rules were apparently eased to facilitate gem and jewellery export, which had declined following the curb on gold import. However, the BJP has questioned the relaxation of rules based on the CAG’s 2016 report which indicated that the scheme was used by jewellers including Modi and Choksi for “round tripping of black money and money laundering”. The Narendra Modi-led government assumed office on May 26, 2014, five days after the relaxation was announced.
So, when was the scheme scrapped?
On November 28, 2014, the scheme was scrapped. “It has been decided by the Government of India to withdraw the 20:80 scheme and restrictions placed on the import of gold. Accordingly, all instructions issued about the scheme from time to time starting with circular number 25 dated August 14, 2013 stand withdrawn with immediate effect,” the RBI stated in a circular. While the legal import of gold declined in the following months, sources claimed that the 80:20 Scheme was not only “encouraging smuggling but was also misused by many traders”. But then the question remains: if the 80:20 Scheme was being misused, why did it take more than six months for the Modi-led government to scrap it? Over three years later, last week, a sub-committee of the PAC reportedly asked the Revenue Department to share details of the scheme and its alleged link with the Punjab National Bank fraud case.