India's Gold Demand Faces Steep Drop After Duty Hike

India's gold consumption is expected to shrink by 10% in 2026, a projected loss of 50 to 60 tonnes. This contraction is a direct result of the government's decision to sharply increase gold import duties from 6% to 15%. This significant duty hike, the largest single increase on record, reverses prior reductions and is anticipated to dampen consumer spending on both investment products and jewelry.

The World Gold Council (WGC) notes that this policy change is likely to reduce overall demand and could potentially boost illicit trade channels. The Indian government, including Prime Minister Modi's public advisories discouraging gold purchases, is contributing to a less favorable outlook for gold in the country. While overall demand may decline, investment gold products like bars and coins are expected to be more sensitive to the duty changes than the culturally important jewelry sector, which has historically shown more resilience to price fluctuations.

Beyond the immediate impact of duty changes, the WGC points out that India's annual gold consumption is also influenced by various economic and environmental factors. These include global gold price movements, household income levels, inflation, and the monsoon season. Economic modeling indicates that duty adjustments affect demand differently in the short and long terms, with varying impacts across product types. Investment demand is particularly sensitive to income, duties, and restrictions, as well as short-term factors like inflation and rainfall.

Jewelry demand, closely tied to cultural events like weddings, tends to be more stable, as consumers may prioritize these occasions over immediate cost concerns. However, historical data shows a strong link between higher import duties and increased unofficial gold inflows. For example, duty increases between 2013 and 2016 were followed by a significant rise in smuggled gold, with a sevenfold increase noted after a 4% duty hike in 2013. This suggests that established smuggling networks can persist even when duties are stable.

The sharp rise in India's gold import duty to 15% poses a significant risk of reviving the trade in smuggled gold. Past duty increases between 2013 and 2016 clearly led to more unofficial gold entering the country, and this trend continued even when duties were steady, pointing to established illicit supply routes. During the period from July 2022 to July 2024, when duties were lowered to 6%, unofficial imports reportedly fell to near zero.

The current reversion to a 15% duty rate, the steepest single increase ever, strongly indicates a potential resurgence in smuggling. This unofficial trade not only results in lost tax revenue for the government but also creates unfair competition for legitimate businesses and can disrupt domestic price discovery. Additionally, Prime Minister Modi's public statements urging reduced gold purchases introduce political influence and could further suppress formal demand beyond what economic factors would suggest.