What is the issue?
- The recent PNB fraud caught the public attention towards the credibility of banks.
- In this backdrop, it is alleged that the 80:20 (gold import) Scheme was designed to help jewellers such as Nirav Modi.
- A 2016 CAG report has also observed that the scheme had resulted in a loss of over Rs 1 lakh crore to the exchequer.
What was the 80:20 scheme?
- The scheme was introduced in August 2013.
- Under the scheme, 80% of gold imports under the scheme could be sold in the country.
- And at least 20% of imports had to be exported before importers could bring in new consignments.
- The permission to import the next lot was to be given upon the fulfilment of the export obligation.
What was the need?
- India is one of the biggest importers of gold globally.
- In 2013, the country’s macroeconomic indicators, especially the current account deficit, were weak.
- The rising gold import and its impact on the current account deficit was further a cause of concern.
- It posed a risk of capital outflows and further weakening of the rupee.
- Coupled with this, the high crude oil prices forced the authorities to implement preventive measures.
- The 80:20 scheme thus aimed to discourage gold imports to rein in the widening current account deficit.
- Subsequently, the rupee recovered after the RBI announced a slew of measures to boost inflows and stabilise the currency.
Why were the rules eased?
- Jewellers, bullion dealers, authorised dealer banks and trade bodies approached the Finance Ministry.
- They requested for a relaxation of the policy.
- Crude oil prices also dropped to a four-year low in 2014.
- The 80:20 scheme was thus relaxed in May 2014 by the RBI at the behest of the Finance Ministry.
- The rules were apparently eased to facilitate gem and jewellery export, which had declined following the curb on gold import.
What was the outcome?
- Initially, only state-owned banks and firms were permitted to import gold.
- These banks and their nominated agencies were allowed to provide gold loans for domestic use to jewellers and bullion traders.
- However, the easing of rules allowed more agencies to import gold.
- In its May, 2014 review, the central bank allowed star and premier export houses to import gold subject to some restrictions.
- 6 to 7 private sector trading firms were also permitted to import gold under the scheme.
- These private firms accounted for 40% of the total gold imports in April-September that year.
What is the concern?
- The relaxation of the rules is now questioned based on the CAG’s 2016 report.
- The report indicated that the scheme was misused by jewellers including Nirav Modi.
- Particularly, it was used for round tripping of black money and money laundering.
What happened thereafter?
- In November, 2014 months after the change of government in the Centre, the scheme was scrapped.
- It has been decided by the Government to withdraw the scheme and restrictions placed on the import of gold.
- The legal import of gold declined in the following months.
- In all, sources claimed that the 80:20 Scheme was encouraging smuggling and was also misused by many traders.
- A sub-committee of the PAC recently asked the Revenue Department to share details of the scheme and its alleged link with the Punjab National Bank fraud case.
Source: Indian Express
