Gold imports need structural solutions, not knee-jerk restrictions

After Prime Minister Narendra Modi’s appeal to reduce the consumption of items such as fuel and gold, the government has taken several steps. While the government itself at various levels is pushing to reduce fuel consumption, the Union Ministry of Finance on this week increased the effective import duty on gold and silver from 6 per cent to 15 per cent. Given that gold is the biggest component after crude oil in the import basket, the expectation is that the higher duty will discourage Indians from buying and help improve the external balance. In FY26, India imported gold worth about $72 billion, and the import bill has more than doubled since FY23. Thus, there is little debate that gold imports put pressure on the external account and have a significant impact during times of stress. However, a tariff increase may not have the desired impact.

 

India is one of the biggest consumers of gold in the world, and most of it is imported. A variety of social, cultural, economic and religious factors drive demand. All of that is unlikely to significantly change because of the tariff increase. Silver also has a significant industrial use, and higher duty will push up the prices of final goods. In terms of pure economic reasons, gold is seen as a store of value and a hedge against inflation. Since liquidity is not much of an issue, even poor families prefer keeping some savings in gold, which can be used in times of stress. Notably, the pure investment demand for gold has increased substantially over time. According to the World Gold Council data, exchange-traded fund demand for gold, for instance, surged from about 7 tonnes in the first quarter of 2025 to about 20 tonnes in the first quarter of 2026. This demand might be tempered a bit by the expectation that the duty increase may be reversed once conditions improve, which would lower the value of holdings. It remains to be seen how the other demand drivers behave.

 

Notably, international gold prices increased about 50 per cent during FY26. Although the physical demand declined by about 5 per cent compared to the previous year, the outgo went up over 24 per cent. Thus, for India, movements in international prices would be more important than the duty increase. Besides, there are other complications. It is well known that higher duties encourage smuggling. The Directorate of Revenue Intelligence reported a considerable decline in gold seizures in 2024-25, after the government reduced duty in July 2024. The reverse can now be expected. Further, under the India-United Arab Emirates Comprehensive Economic Partnership Agreement, India is expected to gradually reduce import duty on silver to zero over a 10-year period. Gold can be imported at a tariff that is one percentage point lower than the most-favoured-nation rate. The share of the United Arab Emirates in India’s gold imports more than doubled between FY23 and FY25. It is likely that more imports will be routed through this channel.

 

Therefore, in the overall policy framework, gold imports must be treated as a structural factor and addressed to the extent possible over time. The government attempted to address the issue through sovereign gold bonds, but the scheme did not succeed for a variety of reasons. It is worth debating whether reducing financial repression will help. Banks are mandated to invest in government bonds under the directive of maintaining the statutory liquidity ratio, which artificially keeps market interest rates low. This helps the government and businesses but hurts savers. Better market-determined interest rates and greater financial inclusion could help shift investment demand from gold.