India is seeing a significant rise in silver imports from Dubai. These imports are coming through the Gift City exchange in Gandhinagar. This is causing worries about revenue losses for the government. There are also concerns about trade conflicts and how these imports meet trade rules. This report looks into these concerns and helps you understand their impact.

India and the UAE have strong trade relations, especially in precious metals like silver and gold. The Comprehensive Economic Partnership Agreement (CEPA) between India and the UAE governs these trade activities. CEPA aims to boost economic ties and reduce trade barriers.

The Gift City exchange, located in Gandhinagar, plays a role in facilitating financial transactions and trade, including silver imports. Since December 2023, Gift City has been the primary hub for clearing silver imports from Dubai—this move significantly influenced India’s bullion market dynamics. 

Surge in Silver Imports

In the fiscal year 2023-24, India witnessed a dramatic 210% increase in silver imports from Dubai. This surge reflects a substantial rise in the volume of silver entering the country from the UAE compared to previous years.

 

Since December 2023, Gift City in Gandhinagar has become the primary hub for clearing silver imports from Dubai into India. This shift occurred as Gift City started handling most silver imports, effectively centralizing the clearance process. This has reduced silver imports through other ports across the country, consolidating Gift City’s role in managing and processing these imports. 

 

Previously, silver imports into India were distributed across various ports, each handling a portion of the total imports. Before Gift City became dominant in December 2023, other ports, such as Chennai and Bengaluru, played significant roles in clearing silver imports. 

Concerns Raised by Trade Bodies

The Global Trade Research Initiative (GTRI) has highlighted several key concerns regarding the surge in silver imports through Gift City from Dubai. These include:

• Rules of Origin: There are doubts about whether imports cleared through Gift City comply with the laws of origin requirements specified in the India-UAE Comprehensive Economic Partnership Agreement (CEPA).
• Potential Revenue Loss: The significant reduction in import duties via Gift City, compared to other ports, may lead to substantial revenue losses for the Indian government.
• Market Distortion: Concentrating silver imports through Gift City could distort traditional import practices and market dynamics, affecting fair competition.
• Conflict of Interest: GTRI has called for an investigation into potential conflicts of interest among export and import firms involved in this trade, raising concerns about transparency and regulatory oversight.

Economic and Market Impact

There is a significant concern over potential revenue losses for the Indian government, estimated at approximately Rs 6,700 crore. This projection stems from the preferential tariff treatment offered through Gift City, where imports benefit from reduced duties compared to other ports. Such revenue losses could strain fiscal planning and resource allocation, affecting government budgets and developmental initiatives.

The trend of centralized import processing through Gift City may not be limited to silver alone but could extend to other precious metals like gold, platinum, and diamonds. This broadening trend across multiple commodities intensifies the economic impact, potentially magnifying revenue losses and regulatory challenges across the precious metals sector. 

The concentration of silver imports at Gift City also disrupts traditional import practices previously decentralized across various ports in India. This decentralization provided flexibility and redundancy in trade routes, minimizing risks associated with logistical disruptions or regulatory changes. 

Regulatory and Compliance Issues

India imposes a 15% import duty on silver, aimed at generating revenue and protecting domestic industries. The regulation and oversight of these imports are primarily managed by the Reserve Bank of India (RBI) and the Directorate General of Foreign Trade (DGFT). These institutions ensure that only authorized agencies can import silver. The import process involves rigorous checks and balances to verify the authenticity and origin of the precious metal.

 

However, there is a notable difference in the level of regulatory scrutiny applied to imports cleared through Gift City compared to other traditional ports. Gift City has emerged as a central hub for clearing silver imports from Dubai, offering a streamlined process that appears to bypass some stringent checks imposed at other ports. This disparity has raised concerns about the potential for regulatory arbitrage, where traders exploit differences in regulatory environments to benefit from lower compliance costs and reduced scrutiny.

Yes, Bank and RBL Bank attempted to import silver from the UAE through ports like Chennai and Bengaluru at the concessional 8% duty. However, these attempts were thwarted as customs authorities demanded detailed documentation to prove compliance with the rules of origin requirements under the India-UAE CEPA. These banks could not provide evidence of the required 3% value addition and specifics of the value-addition process in Dubai. 

Suggested Solutions and Recommendations

The Global Trade Research Initiative (GTRI) has put forth several recommendations:

1. Renegotiating CEPA Terms: One of the key recommendations is to renegotiate the terms of the India-UAE Comprehensive Economic Partnership Agreement (CEPA). Both countries can ensure that the rules of origin requirements are more stringent and clearly defined. This will help prevent tariff arbitrage and ensure that imports genuinely meet the criteria for preferential treatment.
2. Conducting Rigorous Checks on Dubai Exporters’ Value Addition Claims: GTRI emphasizes the need for thorough verification of value addition claims made by Dubai-based exporters. This involves implementing stringent checks to confirm that the required value-addition processes have been completed in Dubai. 
3. Investigating Relationships Between Export and Import Firms: This includes probing potential conflicts of interest and familial ties that could influence trade practices. A thorough investigation can help identify and address any unethical or non-compliant behaviors.
4. Restricting Silver Imports to Nominated Agencies Authorized by RBI and DGFT: Limiting imports to these authorized entities ensures that only those meeting stringent compliance standards can import silver. This restriction would help maintain a higher level of scrutiny and control over the import process.

Conclusion

Enhanced oversight and consistent regulatory enforcement across all import channels are essential to prevent market distortions and protect India’s economic interests.

As India navigates these complexities, policymakers and stakeholders must collaborate effectively. This will ensure that the import process remains transparent, compliant, and beneficial for all parties involved.