Facing Facts: India's Record Silver Imports from UAE - A Paradigm Shift in the Supply Chain?

Debajit Saha

By Debajit Saha
Lead Analyst, LSEG Metals Research

India is the second largest consumer of silver in the world and to meet this demand, the country depends mostly on imports.

In a normal year, imports easily breach 6,000 tonnes, and at times – like in 2022 – even 8,000 tonnes. Further, when imports spike, volumes tend to drop sharply in the following year. For example, last year imports collapsed to 3,625 tonnes after record imports in the previous year, making India’s silver market both unpredictable and interesting.

This year the momentum of imports is extremely strong. In just the first two months of 2024, India’s silver imports surged to a record 2,932 tonnes on the back of replenishment of stocks by manufacturers and investors’ appetite for a quick gain. At the current rate, imports could easily surpass – as a conservative estimate - some 7,000 tonnes this year.

However, what is strikingly different this year is the rapid shifting of trade routes. While the United Kingdom (UK) is the largest supplier of silver to date, it has been observed that its market share is depleting, and there is a credible reason to believe that it may drop further in the coming weeks as the United Arab Emirates (UAE) is steadily increasing its share. The reason behind this assertion is the signing of the India and UAE Comprehensive Economic Partnership Agreement (CEPA) in 2022, under which a mechanism has been drawn to execute bilateral trades at a ‘lower or eliminated tariff’.

Looking at silver, under this agreement it can be imported into the country at a concessional rate of duty, provided the shipment satisfies the ‘country of origin’ and ‘value addition norms’ as defined in the trade agreement.

To put this into perspective, silver imports through the ‘consignment’ route currently attract 15% duty, but under CEPA, duty was levied at 12% (9% duty + 3% tax for value addition in 2023-24). The duty is further reduced to 8% in the current fiscal year, and this process will continue in every fiscal year till 2031-32 when the effective tariff will be reduced to zero and only a 3% tax will be levied on imports for ‘value addition’.

Going by historical data, the UK is traditionally the largest supplier of silver to India. More than 60% of the country’s imports were from the UK until last year. This year, out of 2,932 tonnes of total imports, the UK’s share has shrunk to less than 50% at 1,174 tonnes.

At present this is not alarming from the UK’s point of view, but if we contrast with the UAE, volumes have come from close to zero to 1,097 tonnes (as we provisionally aggregated based on available data from Ministry of Commerce, Govt. of India and India International Bullion Exchange or IIBX). This is certainly a paradigm shift and there is no doubt that this share will increase rapidly as bullion traders will look to bring in more such silver from the UAE under CEPA to reap the benefits of lower duty.

On the other hand, the Reserve Bank of India (RBI) has recently permitted banks to operate as Special Category Clients (SCC) of IIBX.

It means that in addition to the consignment model in the domestic tariff area, these banks are now allowed to execute buy (only) trade on behalf of clients at IIBX. Currently, banks are not importing any silver from the UAE. This provision ensures banks remain competitive in the market as banks currently are only bringing LBMA-approved silver bars through the consignment route at a higher tariff rate of 15%.

Unlike gold where import quantities are restricted (160 tonnes in the current fiscal under CEPA), there is no such restriction on silver imports. This means the UAE could potentially become the largest supplier of silver to India because from a margin incentive, traders would clearly prefer this route. However, Indian banks must be part of the supply chain to do so. The only obstacle banks are facing now is that none of the current overseas suppliers deal in UAE Good Delivery silver, which is a pre-requisite condition under CEPA.

It is yet to be seen how Indian banks position themselves in this shifting trade environment, but they will need to align with overseas suppliers – presumably banks – who are ready to ship UAE Good Delivery silver to them. Once trade partners are established, we believe that imports will dramatically increase from the UAE.

Debajit Saha

By Debajit Saha
Lead Analyst, LSEG Metals Research

Debajit is a Lead Analyst at LSEG, based in Mumbai. He is responsible for precious metals research in Asia, Middle East. He has a bachelor’s degree from the University of North Bengal, India.