Whalesbook
### Gold's Unprecedented Ascent and Economic Repercussions
Gold prices have shattered records throughout 2025, marking their most significant annual performance since 1979. Global prices surged by approximately 67% last year, with international benchmarks reaching a record high of $4,549.7 per troy ounce by late December. This meteoric rise is largely attributed to robust demand for safe-haven assets amidst persistent geopolitical and economic uncertainty, coupled with a weaker US dollar and anticipated interest rate cuts. India, a nation with a deep-seated affinity for gold, holds an estimated 34,600 tons, valued at around $3.8 trillion. This substantial household ownership amplifies the population's acute sensitivity to bullion price fluctuations. In early January 2026, domestic gold prices closely tracked the global rally, reaching INR139,799 per 10 grams.
### Customs Duty Under the Spotlight Amidst Smuggling Surge
The Indian government's decision in July 2024 to slash the basic customs duty on gold from 15% to 6% aimed to curb smuggling and align domestic prices more closely with international benchmarks. This move initially led to a reported decrease in smuggling cases. However, recent weeks have witnessed a resurgence in illicit trade attempts, with grey market operators finding smuggling highly lucrative. Evading the 6% import duty and a 3% sales tax now offers profit margins exceeding Rs 11.5 lakh per kilogram. Customs and Directorate of Revenue Intelligence (DRI) officials have noted this increase, highlighting the lucrative payoff that tempts smugglers. While the duty cut did lead to a temporary 5% dip in domestic prices and a 10% surge in gold jewelry volumes in Q2 FY2025, this was soon offset by escalating international prices.
### Industry Demands vs. Macroeconomic Constraints
Stakeholders within the gold and jewelry sectors are vocally advocating for further customs duty rationalization. Shashi Mathews of CMS INDUSLAW pointed out that existing measures have largely failed to curb smuggling, despite efforts to keep rates aligned with global prices. Kinjal Shah, SVP and Co Group Head at ICRA, indicated that while the mid-2024 duty reduction provided a short-term boost, subsequent international price rallies resulted in higher domestic prices and an over 11% decline in domestic jewelry volumes in the latter half of FY2025. Shah noted that domestic consumption saw a smaller decline (7%) compared to global demand (15% contraction) in FY2025, partly due to the duty cut, but stressed that international trends will likely dominate price movements rather than duty reductions alone. Senco Gold's MD & CEO, Suvankar Sen, emphasized the need for policy measures to enhance affordability and demand stability, including a review of the current 6% import duty. Mangesh Chauhan, Managing Director of Sky Gold & Diamonds, echoed this, prioritizing import duty rationalization on gold, silver, and other precious inputs to ease manufacturing costs and boost competitiveness.
### Budget 2026 Outlook: Cautious Optimism and Fiscal Realities
Despite industry pressure, many experts anticipate that drastic duty cuts in the upcoming Union Budget 2026 are unlikely. Rahul Kalantri, Vice President of Commodities at Mehta Equities, expects the duty to remain broadly unchanged due to the close watch on India's current account deficit (CAD). Niladri N Bhattacharjee, Partner and Metals & Mining Industry Leader at Grant Thornton Bharat, concurs, suggesting that India may lack the fiscal headroom for further reductions. He noted that while India's gold import volume slightly decreased between FY24 and FY25, the value of imports surged over 25% due to higher prices, with jewelry exports lagging behind. The persistent rise in gold prices, often outpacing other investments except silver, underscores its role as a hedge against inflation and currency volatility. The country's trade deficit has widened significantly, partly driven by a surge in gold imports, underscoring the delicate balance the government must maintain between economic stability and catering to domestic demand. Analysts project that the CAD could widen materially in the coming quarters. While gold ETFs have seen record inflows in 2025, driven by their role as a portfolio diversifier, the overarching macroeconomic picture suggests that fiscal prudence will likely temper any significant reduction in gold import duties. The World Gold Council forecasts that ongoing geoeconomic uncertainty could push gold prices higher in 2026, potentially by 15%-30% under severe downturn scenarios, but emphasizes that a reduction in risk premiums would pressure performance. Industry groups like the All India Gem & Jewellery Domestic Council (GJC) have proposed a reduction in GST on jewelry and deferred tax on inventory gains, aiming to alleviate cost pressures. However, the government's focus on managing the CAD and rupee stability will likely remain paramount in its budget deliberations.