According to a study released on Monday, India's imports of gold and silver from its Free Trade Agreement (FTA) partner, the United Arab Emirates, have increased by 210 percent to USD 10.7 billion in 2023–2024. The arbitrage fueling this growth may need revisions to the pact's concessional customs duty rates.

According to the economic think tank Global Trade Research Initiative (GTRI), the India-UAE Comprehensive Economic Partnership Agreement (CEPA) import tax discounts that India gave the UAE are the main reason for this dramatic increase in imports of gold and silver.

India permits unlimited imports of silver with 7% tariffs or customs tax discounts, and 160 metric tons of gold with 1% concessions. February 2022 saw the signing of CEPA, which went into effect in May 2022. Furthermore, India makes it easier for private companies to import gold and silver by letting them do so through Gift City's India International Bullion Exchange (IIBX). This is done from the United Arab Emirates. The study stated that before, only approved agencies could handle these shipments.

"While India's total imports from the UAE fell 9.8 percent from $53.2 billion in FY23 to $48 billion in FY24, imports of gold and silver skyrocketed 210 per cent, from $3.5billion to $10.7 billion," stated the report.

"Import of all remaining products fell 25 percent, from $49.7 billion in FY23 to USD 37.3billion in FY24," said the report. The UAE does neither produce gold or silver or add enough value to imports, according to GTRI Founder Ajay Srivastava, making the present import of gold and silver from the UAE unsustainable.

The problem stems from India's high import levies of 15% on gold, silver, and jewelry. Think about cutting tariffs to five percent. This will reduce widespread smuggling and other abuses, according to Srivastava. Because of its high value, small volume, and hefty import taxes in India, the trade in gold, silver, and diamonds has always been vulnerable to abuse.

According to him, imports of silver and gold with low tariffs simply help a few groups of importers who never share the benefits they get from tariff arbitrage with consumers. In order to assist India balance its trade policies, safeguard domestic revenue, and maintain fair competition in the import of precious metals and jewelry, Srivastava recommended that the government put in place a number of measures.

"The primary cause of the issue is India's high 15% import taxes on gold, silver, and jewelry. Think about reducing tariffs to 5%. This would reduce other forms of abuse and large-scale smuggling," Srivastava added. 

Because of their high import duties in India and their limited volume but great value, the trade in gold, silver, and diamonds has always been vulnerable to abuse.  He said that imports of silver and gold with low tariffs simply help a small number of importers who pocket all gains from tariff arbitrage and never provide them to customers. Srivastava recommended that the government take a few steps to support India in protecting domestic revenue, balancing its trade policy, and ensuring fair competition in the import of jewelry and precious metals.

India should refrain from incorporating gold and silver in any Free Trade Agreements (FTAs) as rising imports lead to a greater current account deficit and because they behave more like financial instruments than ordinary trade goods.

A thorough examination is required since India has given tariff advantages for certain goods under the DFTP (duty-free tariff preference) program and in several free trade agreements. 2008 saw the announcement by India of the LDC (least developed nations) initiative. In keeping with this, 98.2 percent of India's tariff lines (or product categories) offer duty-free or preferential market access.

Furthermore, the research said that because India charged an 8 percent tax under the CEPA  compared to a 15 percent duty from other nations, silver imports from the UAE soared multifold to $1.74 billion in 2023–24 from a meager $29.2 million in 2022–23.

"Due to the significant 7 percent tariff arbitrage, India lost Rs 1,010 crore in income in FY24. India has promised to slash tariffs on limitless amounts of silver from the United Arab Emirates during the next eight years, thus revenue loss will rise," the statement continued. According to the report, this transaction is unique as the United Arab Emirates merely imports big silver and gold bars, melts them, and then ships the unwrought gold and silver grains. "A check with global refiners will show that value addition in such process is much less than 1 per cent as opposed to 3 per cent required under the FTA," it stated.

According to the research, India committed to importing 200 metric tons of gold per year with a 1% tariff discount from the United Arab Emirates. As a result, gold imports increased by 147.6% from $3 billion in FY23 to $7.6 billion in FY24, costing India Rs 635 crore in income. In a similar vein, imports of jewelry into India climbed by 1876.6% from $1.1 billion in FY23 to $3.3 billion in FY24, while imports from the UAE surged by 29% from $347 million in FY23 to $1.35 billion in the most recent fiscal year.