In June 1990, after 28 years of restrictive trade in gold, the Gold Control Act was finally repealed. Finance minister Madhu Dandavate’s argument for doing this was simple: it was more prudent to allow free imports and earn taxes rather than to lose it all to unofficial channels. Anyone could import gold into the country by paying a duty of Rs 250 per 10 grams. The gold market responded: From official imports of practically nothing in 1991, India officially imported more than 110 tonnes of gold in 1992.
But before we jump to any conclusions too quickly, a closer reading of the history of that period is essential. For instance, gold mines in India continued to sell gold for industrial purposes through the branch network of the State Bank of India. Forward trading in gold – and silver – was still prohibited. Exports of silver bullion were banned too, and exports of silver products were subjected to quota restrictions.
Other than jewellery that fell under personal effects of travellers coming in from overseas, imports of gold required special authorisation of the Reserve Bank of India (RBI). In certain cases, jewellers were allowed to manufacture jewellery from imported gold, but only for exports. They were also allowed to replenish gold supplies through the Gold jewellery Export Promotion Replenishment Scheme.
The non-resident Indian scheme was launched in 1992; Indians who stayed overseas for more than six months were allowed to import gold upto five kgs as a part of their baggage, and upon payment of customs duty in a convertible currency, usually US dollars. In 1994, the Government allowed the import of gold through a special import license (SIL) that effectively treated gold as a commodity.
The SIL entitled exporters to buy gold, mostly. The argument for gold market liberalisation was based on the idea that specialist importers of gold would help bring down margins, and make the price of gold competitive. It was an argument that had been used in the past, but reality was a little different. It was the counter argument that prevailed, that gold had monetary implications and thus had to be dealt with differently from other commodities.
In 1997, seven banks were authorised under the Open General License (OGL) scheme as official importers of gold; this number later increased to 20. In 1999, the government tried to mobilise gold through the Gold Deposit Scheme (GDS), launched by the State Bank of India to allow gold to be deposited at a specified interest rate. The result: gold demand rose, and so did prices – not exactly what the policy makers had in mind. Through the eons, gold continues to surprise us all.