Whalesbook
India Navigates Economic Headwinds
Finance Minister Nirmala Sitharaman has identified the "3Fs"—fuel, fertiliser, and foreign exchange—as key factors shaping India's economic path amid global challenges. The nation's merchandise trade deficit expanded to $28.4 billion in April 2026, making gold imports a significant concern. Although physical gold import volumes slightly decreased to 721 tonnes in FY26, the total import cost increased by 24% to a record $71.98 billion, largely due to higher global prices. This surge in gold imports represents about 10-11% of India's total merchandise imports, putting considerable strain on the rupee and foreign exchange reserves.
Policy Paralysis on Gold
Industry groups, such as the All India Jewellers & Goldsmith Federation (AIJGF), believe that revitalizing the Gold Monetization Scheme (GMS) could unlock vast amounts of household and temple gold. However, the government remains hesitant. Since the Medium-Term and Long-Term components of the GMS were stopped in March 2025, the scheme now only permits short-term bank deposits. The Finance Minister's reluctance to set a timeline for an improved GMS indicates a broader administrative caution regarding significant policy changes during times of high price volatility. Instead of revising the GMS, the government has chosen to directly manage demand by increasing import duties to 15% in May 2026, aiming to decrease non-essential gold purchases.
Risks from Import Duty Hikes
This approach has created a difficult situation for gold policy. While higher import duties are meant to protect foreign exchange, economists warn that they could encourage the grey market and smuggling. This, in turn, could reduce formal tax revenue and harm established jewelers. The jewelry industry anticipates a 13-15% drop in sales volume for FY27 as higher costs are passed on to consumers. Small and medium-sized enterprises within the jewelry supply chain are particularly vulnerable, facing liquidity issues and inventory losses. Unlike larger retailers with hedging strategies, these smaller businesses are highly susceptible to price fluctuations and a decline in customer traffic, exposing a structural weakness in the retail sector that government austerity measures have not yet fully addressed.
Government's Optimism and Industry Outlook
Despite these challenges, the government maintains confidence in India's economic stability. The Finance Minister has dismissed concerns about the economy, characterizing the current austerity measures as a necessary response to the ongoing Gulf crisis and global energy price shocks. The focus is expected to remain on long-term strategies for gold mobilization rather than immediate support for the jewelry sector. Analysts predict that until the external current account pressures ease, the government is unlikely to relax gold policies significantly. The jewelry industry must therefore prepare for an operating environment with higher duties and lower sales volumes for the foreseeable future.