On 21st May — five days after UPA's crushing defeat and five days before Modi's swearing-in ceremony — India's gold import rules were changed. This decision, taken by an outgoing government in the fag end of its tenure, is now being challenged in the court of law as it allegedly favours large trading houses, including some of Corporate India's influential business groups.

A writ petition filed by a body representing bullion dealers and jewellers before Delhi High Court is coming up for hearing on August 7. Grappling with dollar outflow, the previous government had imposed a new rule in June 2013 that required a fifth of all bullion imports be re-exported.

While importers like banks and PSU agencies could supply gold to local jewellers, star and premier trading houses could import gold only for export activity.

The rule was relaxed on May 21, 2014. Star and premier trading houses, like other agencies and banks, were given access to the local market as long as one-fifth of import was made available for export.

But more significantly, the quantum of gold that a trading house could import was different than others. While no one could import more than their two months' requirement, the quantum — or the import lot size — was calculated differently for star and premier trading houses.

Since May 21 this year, these companies were permitted to import a lot based on the total monthly import for past two years. But, imports by others like government agencies and banks were linked to their monthly supply of gold to 'exporters' in past three years.

The difference can be dramatic: consider a private agency like a star trading house and a PSU entity like STC or SBI, both having imported 500 kg in a month, of which 10 kg was supplied to exporters; according to the new formula, the star or premier trading house can import as much as 500 kg while STC or SBI can import just about 20 kg for the first lot (which is the first two months' requirement).

Bullion market sources and economists attribute the sudden spurt in gold import in June (which resulted in a higher trade deficit) to the policy relaxation and imports by star and premier trading houses.

"There is no ground made out to recommend private players to import gold under 20:80 scheme, particularly at a time when the new government is being formed... the (May 21) circular has been issued in haste without consultation by the government. The respondents (Union of India, ministry of finance, DGFT, RBI, the Election Commission and others) should have waited for a few days till the formation of the new government," said the petition by the Delhi Bullion and Jewellers Welfare Association.

The association has prayed that the court should declare the new policy as null and void, and take appropriate action for violation of model code of conduct. According to a senior bank economist, one has to wait for a few more months to figure out whether the surge in gold import in June could adversely affect India's currency account deficit (CAD).

High gold imports, among other things, had pushed up CAD to $88.2 billion (or, 4.7% of GDP in 2012-13). The number fell to $32.4 billon (or 1.7%) in 2013-14 following higher import duty on gold and other restrictions.

Source:- economictimes.indiatimes.com