India's Deep Connection to Gold

India has a deep cultural connection to gold, making it hugely significant economically. While gold serves as a traditional hedge and wealth symbol, an estimated $10 trillion remains outside formal financial channels. This vast, untapped store of wealth offers an opportunity to boost the economy and reduce import reliance by channeling it into financial products.

EGRs and the GST Hurdle

The National Stock Exchange (NSE) is pushing Electronic Gold Receipts (EGRs), a SEBI-regulated tool that allows physical gold to be traded on stock exchanges like shares. This aims for greater transparency, liquidity, and purity. However, a major barrier is the 3% Goods and Services Tax (GST) applied when physical gold is handed over to create an EGR. Trading EGRs is GST-exempt, but this upfront tax discourages many. Even with these challenges, gold prices have risen about 30% annually over the last two fiscal years. India's gems and jewellery sector, a key export earner, shows strong revenue growth, with major retailers expanding their stores by around 20% in recent years.

Strong Demand and Growing Loans

Indian consumers' strong preference for physical gold continues to drive robust demand in the jewellery market, even as financialization efforts are underway. Gold is also increasingly used as collateral for loans, with banks and NBFCs seeing their gold loan exposure surge from about ₹1 lakh crore to over ₹4 lakh crore. The organized gold loan market is expected to hit ₹15 trillion by March 2026. Banks now hold nearly 50% of this market as of March 2025. The gems and jewellery market is valued around $90 billion and projected to grow to $128 billion by 2029. While recent government moves, like lowering import duties to 6% in July 2024, aim to aid the sector, gold imports can still affect the current account deficit. However, Finance Minister Nirmala Sitharaman stated that gold imports are not currently at an alarming level.

Key Obstacle: The 3% GST

The main hurdle for moving India's household gold into financial products is the 3% GST on gold surrendered for EGRs. This tax charge counteracts the efficiency benefits EGRs are meant to offer. The vast amount of household gold, estimated by some at $5 trillion, represents capital not used for more productive investments like business expansion or equities. This is a significant opportunity cost, as physical gold doesn't generate income or directly boost economic activity like financial assets can. Despite reduced import duties, the steady demand for gold still strains foreign exchange reserves. Deep cultural and emotional ties to physical gold, often passed down generations, make it hard to replace as a favored asset, especially in uncertain economic times. This often leads people to use gold for loans rather than converting it to electronic form.

Path Forward for Financialization

Successfully channeling India's gold hoard into financial products depends heavily on policy changes, especially regarding the GST on EGRs. Without resolving this tax issue, EGRs' potential to unlock significant economic value will be limited. Although demand for gold jewellery and investment remains strong due to cultural reasons and its inflation-hedging role, the discussion about financialization will continue. Future progress will likely involve dialogue between industry players and regulators to balance gold's appeal with its integration into the formal financial system. Gradual adoption may occur as solutions to the GST barrier emerge.