Opinion: Higher import duties on gold unlikely to curb demand

The Indian government’s policy response appears reactive rather than preventive, as higher gold import duties may fuel smuggling and increase reliance on recycled gold

By Dr Kedar Vishnu and and Suchitra Nair

Prime Minister Narendra Modi on May 10 urged Indian citizens to reduce fuel consumption, defer gold purchases for one year, and avoid foreign vacations. Currently, many economists are deeply worried about the economy for three main reasons:

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• First, India’s foreign exchange reserves fell by $7.794 billion to $690.693 billion in the week ended May 1, 2026, according to data from the Reserve Bank of India. Since the outbreak of the war, the country’s forex reserves have declined by nearly 5 per cent, reflecting rising external sector pressures.
• Second, disruptions in global supply chains and a sustained rise in crude oil prices are likely to widen India’s current account deficit (CAD) — when imports and payments exceed exports and earnings — to around 2 per cent of GDP in FY27. The CAD had already expanded to $13.2 billion, or 1.3 per cent of GDP, during the October–December quarter of 2025–26, signalling growing vulnerabilities in the external balance.
• Third, the rupee has depreciated to Rs 95.65 per US dollar, down by Rs 10.76 over the past year.

These three issues highlight that the economy will face significant challenges in the coming days.

The Prime Minister’s announcement has heightened public anxiety, with many consumers expressing concerns about fuel availability, gold investments, and future economic uncertainty. Amid rising geopolitical tensions and volatile global markets, can gold continue to retain its status as the preferred safe-haven asset?

In India, the demand for physical gold has remained consistently high over the years. There are several reasons for this. Firstly, gold symbolises prosperity and affluence, and thus it is adorned at weddings and festivals. Secondly, gold serves as a safe haven during periods of economic uncertainty, and thirdly, it can be used as a hedge against inflation.

This high demand for gold is met by importing when the domestic supply is limited. The Prime Minister has primarily urged consumers to reduce gold purchases, as gold accounts for nearly 9 per cent of India’s total imports. India’s gold imports surged by over 24 per cent to an all-time high of $71.98 billion in 2025–26, adding further pressure on the country’s trade deficit and external balance. Rising gold prices and imports are expected to widen CAD.

In response, India has raised import tariffs on gold and silver to 15 per cent from 6 per cent, as part of efforts to curb overseas purchases of the precious metals and ease pressure on the country’s foreign exchange reserves, effective May 13, 2026. Similarly, in 2022, the government increased the import duty on the yellow metal from 10.75 per cent to 15 per cent to check the widening CAD and rising imports. In May 2022, 107 tonnes of gold were imported. However, in the Budget 2024-25, the duty was reduced to 6 per cent to boost the domestic gems and jewellery industry, curb illegal smuggling, and bring down local prices.

India’s gold imports surged to a record $72.4 billion in 2025–26 on account of soaring global gold prices, despite a decline in import volumes. Gold imports stood at $57.9 billion in 2024–25 and $45.6 billion in 2023–24. In volume terms, imports fell to 721 tonnes in 2025–26 from 757 tonnes in the previous year. The sharp rise in gold prices pushed India’s overall gold import bill to an all-time high.

 

 

Why is Gold Price Higher

The sharp rise in gold prices in India can be attributed to a combination of investment demand, inflationary pressures, cultural preferences, and central bank purchases. In recent years, many investors have increasingly viewed gold as a safe and reliable investment option, especially during periods of economic uncertainty and global financial volatility.

When inflation remains high, investors often shift their savings into gold to preserve the value of their wealth and earn better returns than other assets. In addition, gold continues to hold strong cultural and traditional significance in India, leading to consistently high demand during festivals, weddings, and other auspicious occasions.

Furthermore, increased gold purchases by the Reserve Bank of India as part of its foreign exchange reserve management strategy have also contributed to the upward movement in gold prices. Together, these factors have played an important role in pushing gold prices to record levels in the Indian market.

Late Move

Although the government has increased import duties on gold to curb rising imports and reduce pressure on the trade and CAD, the move is unlikely to immediately cool domestic prices amid persistent global uncertainty and strong investor demand for safe-haven assets. Higher duties may reduce official imports, but they could also encourage gold smuggling and increase dependence on recycled gold in the domestic market.

Farmers in the rural economy are likely to be adversely affected by rising gold prices, as they primarily use gold for precautionary and speculative purposes. The policy response appears reactive rather than preventive, as stronger measures could have been implemented earlier, when global geopolitical tensions first began to escalate.

This is the right time for investors to look beyond physical gold and explore alternative investment avenues, including Digital Gold, Gold ETFs (Exchange Traded Funds), Sovereign Gold Bonds (SGBs), and Gold Mutual Funds. Digital Gold offers 24/7 buying and selling with no making charges and high liquidity, making it a simple entry point for investors. Gold ETFs invest in physical gold and are traded on stock exchanges like shares, offering lower costs, higher liquidity, and flexibility, making them suitable for long-term investment. Gold mutual funds invest in Gold ETFs and offer SIP or lump-sum investments, making them a convenient, beginner-friendly option.

However, most farmers and rural populations may be unable to explore these alternatives due to limited financial literacy and education. As a result, rising gold prices are likely to have a greater adverse impact on rural households. Furthermore, it is important to build greater confidence among foreign investors so they remain encouraged to invest in India. This would help attract higher net FDI inflows, which have been a major concern over the past six months, and strengthen the focus on increasing domestic production.

 

(Dr KedarVishnu is Associate Professor of Economics, and Suchitra Nair is Economics and Political Science student at Department of Liberal Arts, Humanities & Social Sciences, Manipal Academy of Higher Education, Bengaluru)