The Directorate General of Foreign Trade has enhanced the regulatory framework for duty-free gold imports for gems and jewellery exports. It seeks to promote the exclusive use of imported gold in exportable gems and jewellery while reducing gold purchases due to the ongoing global uncertainty. In India, the demand for gold can be divided into two distinct markets that behave quite differently. The first market consists of gold purchased for socio-cultural reasons, while the second market is focused on gold as an investment.

This article discusses the enduring demand for gold in India, influenced by socio-cultural preferences and its role as a safe place to save money. It finds that India's gold demand primarily stems from investment interests and speculative gains, particularly as gold is viewed as a safe-haven asset during global uncertainty. Despite facing challenges, the outlook for financialisation of gold, treating gold as a paper or digital financial asset traded on the market, is expected to remain strong, while demand for gold jewellery may continue to weaken due to rising prices, reinforcing the trend towards stock-traded investment seeking speculative gains.

The restrictions on gold imports during times of crisis may unintentionally drive demand towards commodity financialisation and informal channels such as gold smuggling and illegal trade in gold, which could diminish the effectiveness of policies and increase external vulnerability. Lowering import duties on gold typically promotes physical gold imports, while raising import duties tends to increase speculative investment in gold exchange-traded funds (ETFs) and boost illegal gold trade. Additionally, both actions put pressure on the Current Account Deficit (CAD).

Commodity ETF vs. Equity ETF

Commodity ETFs that track physical assets such as gold, oil, or agricultural products provide a hedge against inflation and high volatility. These types of ETFs have experienced greater inflows than equity ETFs, which offer ownership in companies and long-term growth through dividends and capital appreciation. While equity ETFs are generally better suited for wealth creation, commodity ETFs serve as effective tools for portfolio diversification. Each rupee invested in a commodity ETF requires asset management companies (AMCs) to import physical gold.

As a result, gold ETFs — financial instruments that allow investors to invest in gold without the need to hold physical gold — have surged dramatically in popularity. This compels AMCs to have the ongoing support of imported physical gold. More gold ETFs are purchased, requiring AMCs to have additional physical gold backing. Gold financialisation continues to grow to create a mutually reinforcing process. Imports may decrease if the gold ETF's full backing of physical gold is relaxed.

The Macroeconomic Impacts of Gold ETFs and Speculative Demand for Gold


Credits: Ajay Verma, Reuters

The volatility in the stock market has prompted retail investors to diversify their portfolios by investing in both physical gold and gold ETFs. A higher import duty on physical gold will likely shift more investors toward gold ETFs. Gold ETFs experienced net inflows exceeding ₹68,000 crore in FY26, which surpasses the total inflows of approximately ₹30,200 crore recorded during the five previous financial years from FY21 to FY25.

By not introducing gold-monetised real investments, investors can still benefit from speculative gains brought about by gold ETFs. Furthermore, the increased import duties and persistent global uncertainty create arbitrage opportunities that make illegal imports highly profitable, which can lead to gold smuggling. For example, following an increase in import duty on gold in FY22, India experienced approximately two gold smuggling cases per day at airports during that fiscal year, with authorities seizing an average of 0.4 kg of gold daily. By FY24, however, the number of daily smuggling cases at airports had risen to 16, and daily gold seizures had surpassed 10 kg.

This leads to capital outflows, significant inflows into gold exchange-traded funds (ETFs), and increases in physical gold purchases, all of which widen the CAD and affect domestic liquidity conditions. To finance a continuous CAD, a country needs a consistent influx of foreign capital. High demand for foreign currencies to cover import costs often results in a weaker domestic currency, contributing to imported inflation. Additionally, since gold is typically viewed as a luxury or semi-luxury item, this situation diverts the country's limited capital toward relatively non-essential expenditures.

Therefore, during times of geopolitical and energy-related instability, financialised gold demand increases India's external vulnerability. Additionally, it creates a conundrum in which attempts to reduce imports result in an increased deficit due to illicit commerce and international financial market arbitrage.

Policy Implications

To alleviate the burden of gold imports on India's CAD, deeper structural reforms are necessary, which should include various tax and non-tax interventions. Implementing import restrictions on finished gold, while simultaneously removing restrictions such as duties and licenses on imports of the gold ores, can stimulate domestic processing and upgrading of gold items. This approach helps prevent the depletion of foreign reserves that would otherwise be spent on costly gold imports.

Encouraging foreign investment and equity ETFs in the processing and refining of gold in India — a country rich in labour and with a significant gold market — can further enhance this effort. For example, the elimination of import duties on copper ore concentrate has positively impacted India's copper processing industry. Additionally, these reforms could enable India to become a key exporter of finished gold and jewellery.

Lower import duties on gold ores attract domestic and foreign investment into local processing capacity. This also reduces people’s tendency to save the portion of their income that they previously used to spend on expensive gold imports, which were paid for in foreign currency. As foreign investment increases, it leads to credit expansion, which can result in inflation.

Rising inflation can reduce the forced savings necessary to finance investments in capital goods for the high-income group, as well as to allocate domestic resources needed to build new industries. It also promotes investing in equity ETFs alongside capital gains tax on stock-traded gold ETFs. Furthermore, a revised gold monetisation scheme can help unlock the gold currently held by the high-income group, facilitating more substantial real investments.

We can consider several measures to address India’s gold dilemma: reducing import duties on gold ore to encourage both domestic and foreign investment in local gold-processing industries; strengthening the capital gains tax on gold ETFs; relaxing the requirements for physical gold backing of gold ETFs; and enhancing the gold monetisation scheme. Implementing these steps could boost domestic processing of finished gold items, reduce gold imports, and encourage investment in equity ETFs.

Conclusion

This essay develops two sets of arguments. The first point is that restricting gold imports during a crisis could unintentionally push demand into financialised and illegal channels, such as gold ETFs and smuggling networks, which would raise external vulnerability and lessen the effectiveness of policy. The second argument is in favour of a more all-encompassing industrial-policy approach that prioritises investments in domestic gold processing, import substitution, and refining capacity. It focuses on imports of gold ore and import substitution, motivated by the fact that gold processing and refining address the current account difficulties.

About the Authors: Ajay Kumar Mishra and Shraddha Rishi

 Ajay Kumar Mishra teaches Economics at Lalit Narayan Mithila University, Darbhanga.

Shraddha Rishi teaches Political Science at Magadh University, Bodhgaya