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Why India could increase duty on gold and silver imports

India's imports of gold and silver reached record levels in the past year. This has caused concern among policymakers. The government lacks effective tools to stop the inflows, which have been resilient despite the sky-high price for precious metals.

Gold imports in the country rose by 1.6% compared to a year ago, reaching $58.9 Billion. Silver imports increased by 44%, hitting $9.2 Billion, as both metals reached record highs.

Why Target Gold and Silver Imports?

India is the second largest consumer of gold in the world and the biggest silver market. However, it imports almost all of its gold needs and more than 80% silver.

In 2018, the country spent almost a tenth its total foreign currency reserves on gold and other metals. The import bill will continue to increase in 2026, as both metals' prices continue to soar.

The rupee has been under pressure this month due to the rising imports, which have increased the trade deficit.

Gold is used primarily for investment and jewellery, unlike silver which has industrial uses ranging from electronics to solar power. The government considers such demand non-essential, and has repeatedly tried to curtail it by increasing import duties. This makes the metal more costly for buyers.

Why are traders speculating about a duty hike?

Gold and silver prices are at record levels. This could cause import values to rise even though volumes may not. This would raise concerns over a growing trade deficit, and a further deterioration of the rupee against the dollar, which is already falling.

Officials from the trade and industry sector say that these concerns could lead the government to increase import duties on silver and gold in the next few weeks.

In 2012 and 2013 the government raised import duties dramatically to stabilize the rapidly depreciating rupia. Since the rupee has been losing ground recently, traders speculate that a new duty hike could be on its way in the coming weeks. This would reverse duties cuts made in 2024. India reduced import duties for both metals from 15% to 6% at that time in order to reduce smuggling.

As markets factor in the possibility of an increase in duty, gold and silver are already trading at a premium compared to global benchmarks.

Why has the demand for Indian gold not slowed down despite high prices?

In India, jewellery accounted for over three-fourths (74%) of the total demand up until 2023. The gold price on the international market has increased by 98% since 2025. While this has affected jewellery purchases in India, the overall demand for gold has not dropped because of the increase in investment demand.

Indians are buying more coins and bars on the physical market. Meanwhile, a growing number are investing in exchange-traded fund. ETF inflows increased 283% from a year ago to a new record of 429.6 billion rupies ($4.69billion). In 2025, India's gold consumption increased by 40% as a result of the investment demand. This is expected to continue in 2026.

Gold and Silver ETFs are investments funds that are traded on stock exchanges just like shares. They are backed up by gold and silver bars stored in secure vaults.

Can a duty hike reduce gold demand?

India has tried to reduce gold imports repeatedly by increasing duties, but without much success. New Delhi increased the import tax for gold from 2% to 10% in August 2013 but demand remained the same.

The domestic gold price has risen from 8,000 rupees for 10 grams at the beginning of 2006 to 162,000 rupees today, but this rally failed to reduce annual demand. The new duty increase of 4 to six percentage points will not deter buyers who have already absorbed the 76.5% price jump in 2025.

However, higher duties could increase investor returns and smuggling. Gold ETFs are expected to continue to see strong inflows as investors look to gold amid weak equity returns.

A sharp drop in price could weaken the investment demand, but increase jewellery sales because buyers who were waiting for a price correction are now returning.

Why are silver imports also a cause for concern?

India's import bill has increased as silver prices have risen more rapidly than gold. Silver demand had been primarily driven by industrial demand until last year. However, in recent months, investment demand has supported imports.

In 2025, silver ETFs will see inflows of 234.7 trillion rupees. This is up from 85.69 trillion rupees just a year ago. Silver ETFs are becoming more popular, and imports could increase if prices continue to rise.

(source: Reuters)