Guards on either side of a border checkpoint between India and Bangladesh scour vehicles and frisk passengers in a hunt for illicit consignments of gold and drugs, as well as food staples such as sugar, grain and even onions.

"We caught smugglers in August who were transporting sugar concealed beneath a layer of sand in their vehicle," said an officer of India's Border Security Force (BSF) in the northeastern city of Shillong, who sought anonymity.

Despite such efforts, illegal barter trade of gold for food items has surged since mid-2022, as India's export curbs fuelled a vast disparity with prices in Bangladesh, causing combined government revenue losses of billions of dollars.

The smuggling distorts India's bullion trade with discounts from official prices, hides unaccounted wealth, and weakens New Delhi's efforts to curb food inflation by limiting exports.

At the same time it undermines Bangladesh's import reduction measures aimed at boosting local farmers' production.

The practice of smuggling gold to buy grain has persisted even after India, the world's second-largest gold consumer, slashed 9 percentage points from its import duty in July, taking it to the lowest in more than a decade.

It is driven by significantly higher food prices in Bangladesh, which traditionally relies heavily on Indian supply.

But instead of simply exploiting the price difference between Indian and overseas gold, grey market operators use gold to barter for items such as sugar, wheat, and onions smuggled into Bangladesh.

The goods are concealed, said a BSF officer, citing the example of a smuggler in India's West Bengal state, arrested in October with 4.7 kg (10.3 lb) of gold worth 35.1 million rupees ($414,000) stashed in his motorcycle's air filter.

He had been offered just 10,000 rupees to ferry 18 gold biscuits into India to pay for food items already smuggled into Bangladesh, said the officer, who spoke on condition of anonymity.

On India's border with Bangladesh, the BSF follows a non-lethal policy that reduces deterrence, unlike the western border with Pakistan, where officers carry firearms to block illegal entry, the officer added.

LUCRATIVE ARBITRAGE

Traditionally the biggest supplier of grains to Bangladesh, India imposed curbs on exports of staples such as wheat, sugar, rice, onions and pulses to rein in food inflation from 2022.

But gold prices have rallied more than 50% since the middle of that year, encouraging wider activity by grey market operators to exploit the arbitrage opportunity as food prices in Bangladesh spiked as much as 150% over those in India.

The gold-for-grain trade flourished as India steadily tightened curbs on food exports over the past two years, said a grains dealer in the eastern city of Kolkata, who spoke on condition of anonymity.

More than 2 million metric tons of staples have been smuggled into Bangladesh each year in exchange for gold, up from less than 300,000 tons before India's curbs, officials estimate.

"The government limits farm exports to quickly lower local prices. But smuggling weakens that strategy, and farmers end up bearing the brunt of the restrictions," said Balwant Holkar, a trader in Lasalgaon in the western Indian state of Maharashtra.

Meanwhile, India's illegal imports of about 156 metric tons of gold last year, worth about $9 billion, were up from 100 tons in 2022, the World Gold Council (WGC) says.

Nearly a third originated from Bangladesh, say industry and government sources, with the bulk used to settle payments for smuggled grain, the BSF and India's Directorate of Revenue Intelligence (DRI) officials told Reuters.

New Delhi lost an estimated $1.6 billion in unpaid taxes last year to gold smuggling, industry officials estimate from WGC data.

IMPORT DEPENDENCY

India banned exports of wheat in mid-2022 and curbed those of white rice and sugar in 2023, while levying high taxes on shipments of onions and parboiled rice.

But Bangladesh kept import taxes high, making it even more attractive to smuggle grain across a porous border stretching more than 4,000 km (2,500 miles), said a Dhaka-based grains trader, who sought anonymity as the matter is sensitive.

In 2012, when India increased gold import duties, smugglers earned a margin of 54,000 rupees a kilogram, which rose to a peak of 1.3 million rupees in mid-2024, industry estimates show.

Despite the July tax cut, margins remain lucrative, at 700,000 rupees per kg.

"Even after accounting for operational expenses, grey market operators still realise significant profits," said James Jose, secretary of the Association of Gold Refineries and Mints. "This is why smuggling persists, even after the duty reduction."

Gold refining in India yields very thin margins, but grey market operators offer hefty discounts because they evade taxes, said Harshad Ajmera of wholesaler JJ Gold House in Kolkata.

"You can't compete with them," Ajmera said. "You just lose market share."

India's sugar export ban drove a surge in global prices, roughly doubling the price of the sweetener in Dhaka over its price in eastern India, luring grey market players.

To pay for items from India, Bangladeshi buyers use cartels to deliver the gold across the border, where Indian suppliers exchange it for cash in Kolkata to start a new trade cycle.

After India banned exports, Bangladesh's official imports of raw sugar dropped 25% in the fiscal year ending in June, to 1.386 million metric tons.

That gap was bridged with about 450,000 tons of smuggled sugar, mostly paid for with gold, said some participants in official trade.

"For the last few years, there's been no shortage of work," said an Indian courier living near the border, adding that he got paid immediately on delivering gold from Bangladesh at a day's notice. ($1=84.6825 Indian rupees)

(Reporting by Rajendra Jadhav; Additional reporting by Ruma Paul in DHAKA, Subrata Nag Choudhury in Kolkata and Nikunj Ohri in New Delhi; Graphics by Sumanta Sen;)