Nilesh Shah interview: ‘By slowing down gold imports, we will stop flight of savings & capital’

Nilesh Shah interview: ‘By slowing down gold imports, we will stop flight of savings & capital’

Our gold imports are rising and resulting in significant flight of capital. Between March 2011 and March 2019, the net import of gold and precious stones amounted to about $245 billion.

Nilesh Shah

Gold prices breached Rs 40,000 per 10 gram mark last week. With India being one of the largest importers of gold with total imports of $32.8 billion in 2018-19, Nilesh Shah, MD, Kotak Mahindra AMC, told Sandeep Singh that the country needs to reduce gold import and stop this flight of capital so that it can be deployed in the form of investments in the economy. He also proposed that Customs duty on gold should be replaced with GST. Excerpts:

How do you see the rise in gold import at a time when prices are rising?

Our gold imports are rising and resulting in significant flight of capital. Between March 2011 and March 2019, the net import of gold and precious stones amounted to about $245 billion. Against this, in the same period, the net FPI inflows (both debt and equity) stood at $145 billion. We have remitted $100 billion over last nine years for gold import. It is a loss of savings in the economy and flight of capital. You can imagine the kind of multiplier effect it would have had on our economy.

Even at a multiplier effect of two, $100 billion retained in country would have added around $200 billion to our GDP, which is around 7 per cent of our current GDP. In 9 years, we have lost 7 per cent of GDP. In 70 years, we have lost more than half of current GDP. That is the kind of loss we are having on account of gold import. By slowing down gold imports, we will stop flight of savings and capital, push retained savings for domestic investments to generate higher GDP growth. Growth can’t happen without money.


Over the last several years, gold has generated returns equivalent to benchmark Sensex at the BSE. How do you see that?

Returns from gold can be broken into three parts. One is price movement due to demand and supply. Indians, being the largest buyers of gold, have influenced the prices upward. Second is currency depreciation, as rupee depreciates on exodus of capital.

Third is import duty, as local gold price is higher than global price by 12.5 per cent due to import duty. In some sense, there is a self-fulfilling cycle in gold as higher Indian demand for gold increases price and results in weaker rupee, which makes gold returns look better, which in turn increases demand. If we had channelised the savings in the economy, it would have resulted in higher domestic investments, higher GDP growth, higher corporate earning and higher equity gains. It would also have arrested the slide of rupee against dollar.

Gold is also encouraging parallel economy as lot of black money is getting invested in gold. While the import duty of 12.5 per cent was put in place to discourage gold demand and import, it has in fact created higher demand for gold as returns have become attractive. Gold price without import duty will be Rs 35,555 per 10 gram and with import duty will be Rs 40,000 per 10 gram. More importantly, import duty has encouraged gold smuggling, resulting in expansion of black economy and hawala market.

The real worry for us should be accentuation in capital flight, if Indians decide to invest incrementally in gold away from bank deposits and equity. Gold is liquid, has lower taxes and is insurance against Indian economic policy and looks more rewarding over last three decades. A country can’t reach its growth potential if capital flight takes place, as has been the case in Russia or Latin America. If we have to become $5 trillion economy, we can’t afford our precious capital go away.

Do you think the government needs to crackdown on gold holdings too in a way it did on cash holdings through demonetisation?

If we can do something for cash, why not for gold? While it will create its own inconvenience, we have to see how we can stop haemorrhage of capital out of our country even as we need it the most. We need to find a solution.

We can’t keep sending hundreds of billions of dollars in gold import and then keep waiting for foreign investors to invest their dollars in India.

What are the solutions for us?

We have to do multiple things to reduce demand for gold and monetise existing holdings. We must encourage people to buy light jewellery and of lower purity. For example, 14 carat gold jewellery instead of 22 carat. We also need to work on making financial asset buying as simple as buying gold.

There are more women doing monthly investment in gold jewellery account with jewellers than SIP in mutual funds. We must reverse that. Gold bond is one way to stop this wasteful spending but, the procedural aspects have restricted its appeal. We must remove the inconvenience in buying gold bonds and encourage secondary market trading.

We must encourage financial innovation to monetise existing holding of gold. Lot of gold is held in religious trusts, they should be incentivised to monetise gold for social causes. We must change our taxation policy on gold. Import duty is encouraging smuggling of gold and is pushing people to buy gold as domestic prices have surged post levy of import duty and raised the prices. A better method would be to impose GST on gold purchase.

How can GST levy instead of import duty benefit?

The government should reduce customs duty on gold to zero and increase GST on gold and gold jewellery to similar extent. There are multiple benefits of such move. By removing import duty and charging GST, gold will be treated as an item of consumption rather than investment. Every time someone buys gold or jewellery, he or she straight away loses 12.5 per cent of value. It will be like any consumption item where the value of the item after purchase is lower than the purchase price.


This will discourage unnecessary buying of gold. Gold smuggling will come down significantly as no price arbitrage will be left. Jewellers will benefit as net tax impact is positive with GST offset. The government will be fine as GST and import duty would by and large be cash neutral.