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.
