India’s gold import duty hike: A double-edged sword

Prime Minister Narendra Modi’s recent appeal to citizens to curb gold buying for one year, followed by the government’s decision to raise customs duty on gold from 6% to 15%, has sparked debate across economic and investment circles. The move is aimed at protecting India’s foreign reserves and strengthening the rupee. However, given India’s cultural affinity for gold and past experiences with similar measures, the effectiveness of this policy remains questionable.

Why the Appeal to Citizens

India is the world’s second-largest consumer of gold, with nearly 90% of its demand met through imports. This heavy reliance has consistently placed pressure on the current account deficit (CAD), making gold a critical factor in India’s external balance. In FY26, gold imports surged to nearly $72 billion, despite lower import volumes, largely due to rising global prices. Such persistent demand has prompted the Prime Minister to urge citizens to voluntarily reduce consumption, aiming to ease the burden on foreign reserves and stabilize the rupee. The appeal also reflects concerns over widening CAD amid elevated crude oil prices, which together strain India’s economy. By curbing gold buying, the government hopes to conserve forex reserves and strengthen the currency.

Current Account Deficit and Crude Oil Prices

India’s current account deficit (CAD) has widened considerably, driven primarily by two major imports, crude oil and gold. Elevated crude oil prices, fuelled by ongoing geopolitical tensions in West Asia, have placed significant downward pressure on the rupee. A rising CAD not only weakens the currency but also increases borrowing costs, reduces investor confidence, and heightens vulnerability to external shocks. In this context, restricting gold imports is viewed as a temporary measure to ease the imbalance and conserve foreign reserves.

Gold Imports and Forex Pressure

Gold imports account for nearly 9–10% of India’s total import bill, making them a significant contributor to external imbalances. By curbing imports, the government hopes to conserve foreign reserves, reduce pressure on the current account deficit, and stabilize the rupee. Yet the structural nature of India’s gold demand, deeply rooted in cultural traditions, weddings, and festivals, limits the effectiveness of such restrictions. Even when prices rise, demand tends to rebound during peak seasons, reflecting gold’s enduring role as both ornament and investment. Thus, while the policy may offer short-term relief, its long-term impact remains uncertain.

Risk of Illegal Imports

India has witnessed this cycle repeatedly. Whenever import duties on gold were raised sharply, smuggling surged, undermining official trade channels and eroding government revenue. This prompted policymakers to reduce the duty to 6% last year in an effort to narrow the price gap and discourage illegal inflows. With the latest hike back to 15%, the risk of illicit imports is once again elevated. Smuggling not only distorts the domestic market but also complicates regulation, creating parallel channels of supply. Such unintended consequences highlight the limitations of relying solely on duty hikes to manage India’s persistent gold demand.

Impact on Gold Demand

In the short term, higher gold prices may dampen demand, as consumers delay purchases or shift to lighter ornaments. However, India’s gold consumption is deeply entrenched and resilient. Weddings, festivals, and cultural traditions ensure steady demand regardless of price fluctuations, making gold more than just an investment, but a social necessity. With the peak demand season approaching, imports are expected to rise again, even if unofficial channels play a larger role due to the widened price gap. This persistence highlights that duty hikes can only offer temporary relief, while long-term demand remains largely unaffected.

Can Duty Hike Alone Achieve the Goals? Exploring Alternatives

Raising customs duty on gold to 15% is unlikely to achieve the government’s objectives in isolation. While it may temporarily reduce official imports, the widened price gap between domestic and international markets encourages smuggling and unofficial trade, undermining the policy’s intent. India’s resilient appetite for gold means demand will persist regardless of higher duties. Instead of relying solely on import restrictions, the government could pursue alternative strategies. Expanding and simplifying the Gold Monetization Scheme would help unlock the vast idle gold reserves held by households and temples. Establishing a Gold Bank could provide a centralized platform for importers, improve transparency, and reduce dependence on physical imports. Promoting Sovereign Gold Bonds and gold-backed financial instruments would also channel investment demand into formal avenues.

What Should Investors Do?

Investors need not panic in response to the recent hike in gold import duty. Gold prices have risen rather than declined, ensuring that current holdings continue to retain value. Historically, gold has proven to be a reliable safe-haven asset, particularly during periods of geopolitical uncertainty and economic volatility. For those looking to maintain or expand exposure, instruments such as Exchange Traded Funds (ETFs) and Sovereign Gold Bonds offer attractive alternatives, as they eliminate concerns over purity, storage, and making charges. These vehicles also provide liquidity and, in the case of Sovereign Gold Bonds, additional interest income.

While higher duties may temporarily affect official imports, India’s cultural and investment demand for gold remains resilient. Once tensions in West Asia ease, global gold prices could surge further, which in turn may lift domestic prices. Thus, investors should view gold as a long-term hedge rather than a short-term speculative play.