Whalesbook
Leveraging India's Vast Gold Reserves
The industry's counter-proposal focuses on unlocking India's vast privately held gold stocks – among the world's largest – as a sustainable way to manage foreign exchange instead of simply cutting consumer demand. The Federation argues that suppressing demand could devastate the entire jewelry ecosystem, from artisans to small jewelers, whose incomes depend on consistent sales. This highlights a core disagreement on managing foreign exchange: should it be by curbing demand or by using existing domestic gold assets?
Forex Concerns Ignite Industry Pushback
Prime Minister Narendra Modi's recent call for citizens to postpone gold purchases, citing global supply chain issues and the West Asia war, prompted a strong response from the All India Jewellers & Goldsmith Federation (AIJGF). The federation argues these measures, meant to conserve foreign exchange, threaten the jobs of about 35 million people working in the sector. India's foreign exchange reserves fell to $690.69 billion by May 1, 2026, with gold holdings contributing to this decrease. Gold prices remain elevated at $4,731.06/oz on May 11, 2026, despite some short-term volatility. The AIJGF's response directly challenges the government's strategy by highlighting the socio-economic impact on jobs over immediate financial adjustments.
Industry's Solution: Domestic Reforms
The AIJGF's proposed solution centers on a strong strategy to mobilize and recycle domestic gold. A key part of this proposal is establishing a dedicated bullion bank, potentially within the Gujarat International Finance Tec-City (GIFT City) or the India International Bullion Exchange (IIBX) ecosystem. The IIBX, launched in 2022, aims to formalize bullion trading and streamline imports, creating a more transparent, globally aligned market. The federation also suggests allowing gold Exchange Traded Funds (ETFs) to lend some holdings and revamping the current Gold Monetization Scheme (GMS). However, the GMS has faced significant challenges, with its medium and long-term components discontinued in March 2025 due to poor performance. Historically, efforts to curb gold demand have often led to more smuggling and recycling rather than less overall consumption, showing how deeply gold ownership is ingrained as a store of value and hedge against currency depreciation in India. India's annual gold imports remain substantial, reaching $71.98 billion in fiscal year 2025-26, highlighting the country's reliance on imports. Geopolitical tensions, such as the conflict in West Asia, have historically boosted gold prices as a safe-haven asset. However, recent market performance suggests monetary policy and interest rate expectations may now be stronger price drivers than conflict risk.
Livelihood Risks and Failed Schemes
Despite the government's focus on conserving foreign exchange, the AIJGF points to a clear failure in demand suppression strategies. Past government efforts to limit gold imports, aimed at reducing the current account deficit, historically pushed demand into informal channels or smuggling instead of eliminating it. This suggests such appeals may be ineffective long-term. Furthermore, the limited success and discontinuation of key Gold Monetization Scheme components signal weaknesses in the government's ability to effectively mobilize idle domestic gold. The industry federation worries that sharply dampening demand artificially could disproportionately harm millions of artisans and small jewelers, jeopardizing their economic stability. Gold's cultural significance in India as savings and a hedge against currency devaluation means a complete halt in demand is unlikely, potentially leading to prolonged uncertainty for the sector. While the IIBX and GIFT City financial hub offer new avenues for structured trade, their impact on deeply ingrained cultural demand patterns remains to be seen.
The Path Forward: Reforms or Short-Term Fixes?
The AIJGF's call for a dedicated bullion bank and a renewed approach to gold mobilization offers a vision for long-term economic integration and stability. This approach aims to convert India's vast private gold holdings into productive assets, reducing import dependency without sacrificing jobs. While gold ETFs have grown strongly, with Assets Under Management exceeding Rs. 1,00,000 crore by October 2025, signaling investor interest in financial gold, the main challenge is still mobilizing physical household gold. The success of the AIJGF's proposals depends on overcoming structural hurdles that have plagued previous monetization schemes and addressing gold's deeply ingrained cultural role as a primary savings vehicle for Indian households. This debate highlights the complex interplay between national economic policy, global geopolitics, and gold's enduring significance in India's economy and society.