Spurt in gold, silver imports under UAE CEPA may drain India revenues

A spurt in imports of gold and silver from the United Arab Emirates (UAE) under a bilateral free trade agreement may become a drag on India’s current account, think tank Global Trade Research Initiative has cautioned.

Indian imports of the precious metals from the UAE rose threefold from $3.5 billion in fiscal 2023 to $10.7 billion in the past fiscal, despite a 9.8% decline in overall imports from the Middle Eastern country.

India allows 7% tariffs concessions on import of unlimited quantities of silver and a 1% tariff concession on 160 metric tons of gold under the India-UAE Comprehensive Economic Partnership Agreement (CEPA).

New Delhi allows private firms to import gold and silver from the UAE through the India International Bullion Exchange (IIBX) in Gift City, previously restricted to authorized agencies.

Gold rush

The Directorate General of Foreign Trade (DGFT) also “supports gold jewellery imports from the UAE by restricting those from other countries.” Last July, it restricted plain gold jewellery imports; this June, it restricted studded gold jewellery imports, both with exceptions for imports from the UAE under the CEPA. This policy has increased imports from the UAE, worsening India’s trade deficit, GTRI said.

“The current import of gold and silver from the Emirates is unsustainable as UAE does not mine gold or silver or add sufficient value. The trade will shift to any country that gets bigger tariff concessions from India,” Ajay Srivastava, founder and director of GTRI, said.

“Trade in gold, silver, and diamonds has been prone to misuse due to their low volume but high value and high import duties in India,” Srivastava said, adding that low tariff imports of gold and silver “only benefit the few importers who keep all profits arising through tariff arbitrage and never pass it to consumers.”

Silver glitters

Silver imports from the UAE surged by 5,853% from $29.2 million in FY23 to $1.74 billion in FY24 as India charged 8% tariffs under CEPA against 15% on imports from other countries under the most favored nation (MFN) status.

This 7% tariff difference caused a ₹1,010 crore revenue loss for India in FY24. This loss is only expected to grow as India plans to eliminate tariffs on unlimited silver imports from the UAE within eight years.

Srivastava noted that this trade is “unusual” as the UAE doesn’t produce silver but imports and converts large silver bars into silver grains.

A check with global refiners will show that value addition in such process is much less than 1%, as opposed to the 3% required under the FTA, he said.

“Despite this, traders claim and the UAE authorities certify a 3% value addition to meet CEPA rules of origin. It also needs to be seen if this transformation will meet the tariff change criteria. Both import and export items could have same HS6 digit code,” Srivastava said.

In FY24, India imported $5.4 billion worth of silver globally. As tariffs drop to zero over the next eight years, most silver imports will likely come from the UAE, resulting in a ₹6,700 crore revenue loss due to the tariff advantage. This trade is driven primarily by the lower tariffs offered by India, GTRI said.

Profitable trades

India agreed to import 200 metric tons of gold annually from the UAE with a 1% tariff concession, reducing the duty to 14% under CEPA when compared with 15% under the MFN tariff. This 1% difference, amounting to ₹71,000 per kilogram of gold, has made importing gold bars from the UAE profitable.

Consequently, gold imports from the UAE rose by 147.6%, from $3 billion in FY23 to $7.6 billion in FY24, causing India to lose ₹635 crore in revenue in FY24, GTRI pointed out.

The UAE does not produce gold but imports high-purity gold bars and converts them into unwrought gold for export to India. These simple processes do not meet the 3% value addition required under CEPA, Srivastava said.

India’s overall gold jewellery imports increased by 187.6%, from $1.1 billion in FY23 to $3.3 billion in FY24. Imports from the UAE surged by 290%, from $347 million in FY23 to $1.35 billion in FY24. With current DGFT restrictions on even MFN duty imports, it is expected that all jewellery imports will be routed through the UAE in the near future. This policy negatively impacts jewellery imports from countries like Indonesia, which are allowed under the Asean-India FTA, GTRI noted.

India has agreed to eliminate duties on platinum in five years and on cut and polished diamonds in ten years under CEPA. This could lead to most of India’s imports of these items being routed through the UAE. The MFN duty on rough diamonds is currently zero, but India previously had a 2.5% duty. If India increases tariffs on rough diamonds in the future, all imports, worth $14 billion in FY24, may also come through Dubai to benefit from the zero-duty agreement under CEPA, the think tank said.

Remedial measures

Srivastava has suggested reassessing and potentially revising the concessional duty rates under CEPA to mitigate the arbitrage driving the surge in imports of gold and silver.

“At least, implement yearly import quotas (tariff rate quotas) for silver, similar to those for gold, to control the volume of imports and prevent revenue loss,” he said.

GTRI has also called on authorities to “rigorously verify the claimed value addition by Dubai-based refiners in gold and silver imports to ensure compliance with CEPA rules of origin.

“Increased imports contribute to a higher current account deficit. Since gold and silver act more like financial instruments than regular trade items, India should avoid including them in any FTA. If necessary, the
decision should be made by the RBI, not by the department of commerce,” Srivastava added.

($1=Rs83.65)