India has significantly increased the import duty on gold and silver, nearly doubling it to 15%. This measure is aimed at curbing the nation's substantial reliance on overseas metal imports and alleviating pressure on its crucial foreign exchange reserves. The new duty structure, announced through recent government orders, integrates a 10% basic customs duty with an additional 5% Agriculture Infrastructure and Development Cess.
Government's Stance on Gold Imports
This decision follows a rare public appeal from Prime Minister Narendra Modi, who urged citizens to refrain from purchasing gold for a year. His call underscored the government's serious concerns regarding the strain on India's reserves, as the country fulfills almost all of its gold demand through imports, making it a significant contributor to the trade deficit.
Industry Reaction: Demand Hit and Smuggling Concerns
The bullion and jewelry sector has reacted with mixed views. Surendra Mehta, national secretary at the India Bullion and Jewellers Association, acknowledged the government's intent to manage the current account deficit but cautioned about the potential impact. "As expected, the government has raised duties to curb the current account deficit. However, this could affect demand, as gold and silver prices were already elevated," Mehta stated.
A more pressing concern for the industry is the anticipated resurgence of illicit trade. A Mumbai-based bullion dealer, speaking anonymously, warned that grey markets are likely to become active again due to the significant profit incentives created by the higher duty. This mirrors a historical pattern; smuggling had notably decreased after India lowered gold tariffs in mid-2024, a trend that Wednesday's sharp reversal risks undoing.
Broader Market Context
The duty hike comes at a complex time for India's gold market. Investment demand for gold has seen a surge over the past year, driven by a sustained price rally and underwhelming returns from equities. Data from the World Gold Council shows that inflows into India's gold exchange-traded funds (ETFs) jumped 186% year-on-year in the March quarter, reaching a record 20 metric tons.
Prior to this latest increase, the government had already implemented measures to tighten import controls. A 3% integrated goods and services tax (IGST) on gold and silver imports had previously caused banks to halt purchases for over a month, pushing April imports to a near 30-year low. While banks have since resumed buying after absorbing the IGST, bullion dealers predict that the new duty increase will likely lead to another sharp decline in imports.