India's gold policy trap:
Cut duty to curb smuggling, raise to save rupee
New Delhi, May 14, 2026
India is the world's second-largest gold consumer, and more than 90 per cent of its demand is met through imports
The Centre on Wednesday increased import duty on gold and silver to 15 per cent from the previous 6 per cent. The import duty on platinum was also raised to 15.4 per cent from 6.4 per cent. The move comes at the height of the West Asia war, which has sent global oil prices over $100 per barrel and the demand for safe-haven precious metals higher, intensifying pressure on India’s trade deficit and the rupee.
The decision also follows Prime Minister Narendra Modi’s recent austerity appeal to the citizens, in which he asked people to avoid buying gold for a year, alongside reducing fuel consumption, limiting foreign travel, and working from home where possible.
India is the world’s second-largest gold consumer, and more than 90 per cent of its demand is met through imports. Much of this demand comes from the jewellery industry. In FY26, India’s gold imports hit a record high of $71.98 billion.
A recurring policy dilemma
India’s dependence on gold imports creates a policy dilemma for the Centre, as higher import duties often end up fuelling gold smuggling by widening the gap between domestic and international prices. While a lower import duty can boost buying activity and reduce illicit inflows, it also puts pressure on the trade deficit and the rupee by increasing the outflow of US dollars.
The government repeatedly use import duty as a macroeconomic tool during periods of external stress, only to later soften the same policy when high tariffs fuel gold smuggling.
Talking about the rise in duty, Hareesh V, Head of Commodity Research, Geojit Investments Limited, said, "This move will immediately push up local gold prices, which could temporarily dampen demand. However, given India’s strong cultural and economic affinity for gold, the long-term demand is unlikely to see a significant decline.”
The import duty hike comes almost two years after the Centre cut import duty on metal to curb illegal smuggling and reduce local prices.
In July 2024, the government cut the import duty on gold to 6 per cent to support the domestic gems and jewellery industry and reduce smuggling. The move came nearly two years after the Centre had raised the duty to 15 per cent from 10.75 per cent amid concerns over the widening Current Account Deficit (CAD) and rising gold imports after the Russia-Ukraine war broke out.
Hareesh added, “Higher duties may also create incentives for illegal imports, as was observed earlier when the duty stood at 15 per cent before being reduced to curb smuggling. In the short run, though, this measure can help reduce the import bill and ease pressure on the widening CAD. Since gold accounts for nearly 9-10 per cent of India’s total import bill, the hike could provide some protection to foreign exchange reserves.”
Why does the same policy lever struggle to achieve both goals?
In 2013, the government raised gold import duties three times as India grappled with a record-high current account deficit, a weakening rupee, and mounting foreign exchange outflows linked to gold imports. The import duty was first raised to 6 per cent from 4 per cent in January, then increased to 8 per cent in June, and just two months later, the government hiked it further to 10 per cent.
Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities, said the duty hike is likely to have a short-term impact on physical demand, as higher prices and recent government messaging around reducing bullion imports may make buyers cautious, especially in the jewellery segment.
“Domestic premiums could also remain elevated in the near term due to higher import costs.”
However, he noted that the hike changes very little in the broader trend from an investment perspective. “The rally in precious metals continues to be driven largely by global factors such as geopolitical uncertainty, inflation risks, central bank policies, currency weakness, and safe-haven demand,” he added.
"The current duty hike should be seen more as a one-time policy impact rather than a structural change in the long-term outlook for bullion," he said, adding that any correction created by policy action may offer accumulation opportunities for long-term investors.
India’s gold demand has historically remained resilient despite repeated duty hikes, driven by cultural buying, wedding demand, and the metal’s appeal as a safe-haven asset during periods of global uncertainty.
[The Business Standard]
