Centre Raises Import Duty on Gold and Silver

Why in News?

The Union government has raised the import duty burden on gold and silver. The effective customs duty structure has moved from around 6% to 15%, with Basic Customs Duty increased to 10% and Agriculture Infrastructure and Development Cess increased to 5%. When IGST is also factored in, the total effective tax incidence can be higher, as calculated in the news report. The move has been justified in the background of pressure on India’s external sector due to high crude oil prices, geopolitical instability in West Asia, rupee pressure and concerns over the current account deficit.

For UPSC, this issue is important because it connects external sector management, current account deficit, customs policy, gold demand, smuggling, MSMEs, exports, inflation and governance transparency.

Understanding the Policy Change

Earlier, gold and silver imports attracted a lower customs duty structure. Now the government has raised the duty burden by increasing both the basic customs duty and AIDC.

The distinction is important for Prelims. Many reports refer to the duty hike from 6% to 15% because they count customs duty plus cess. The article’s calculation of 18.4% includes the additional effect of IGST on imports.

Why Gold Imports Matter for India

Gold is not an ordinary import for India. It is deeply embedded in Indian society as jewellery, savings, investment, social security and a cultural asset. However, from the macroeconomic point of view, gold imports create a major foreign exchange outflow.

India imports a large quantity of gold because domestic production is negligible compared to demand. Reports indicate that India imported around $72 billion worth of gold in the last financial year, making it a significant contributor to the import bill.

This is why gold often becomes a policy concern during periods of external vulnerability. Unlike crude oil, fertilisers, defence imports, industrial raw materials or capital goods, gold is not directly essential for productive capacity. Therefore, governments often classify it as a non-essential import for macroeconomic management.

Link with Current Account Deficit

The current account records a country’s trade in goods and services, net income from abroad and net transfers. A current account deficit occurs when the value of imports and outward payments exceeds exports and inward receipts.

Gold affects CAD through the merchandise trade account. When India imports more gold, the import bill rises. If exports do not rise proportionately, the trade deficit widens, which can increase the current account deficit.

This is especially important when crude oil prices are also high. India is a major crude oil importer, and any rise in global oil prices increases the import bill. If gold imports also remain high at such a time, the combined pressure on the external account can become significant.

Thus, the government’s logic is straightforward: if essential imports such as crude oil cannot be compressed easily, then non-essential imports such as gold and silver may be discouraged through higher duties.

Gold Duty as an External Sector Management Tool

The duty hike is not merely a revenue measure. It is an attempt to influence import behaviour.

The intended objectives are:

1. Reduce gold and silver imports.
2. Lower pressure on the trade deficit.
3. Protect foreign exchange reserves.
4. Support the rupee.
5. Prioritise forex for essential imports such as energy, fertilisers, defence, industrial inputs and capital goods.

This shows how customs duty can be used as a tool of external sector management. However, such measures are usually short-term and defensive. They do not address the structural reasons behind India’s high gold demand.

The Problem of Inelastic Gold Demand

A major criticism of the decision is that gold demand in India is relatively price inelastic. This means that demand may not fall significantly even when prices rise.

Gold demand in India is driven by:

Therefore, a higher import duty may increase the price of gold without sharply reducing demand. This is why industry bodies have criticised the move as a blunt instrument.

Smuggling and Informalisation

The most important criticism is that high import duties may increase gold smuggling.

When import duty rises, legally imported gold becomes expensive. This creates a price gap between official gold and smuggled gold. Smugglers can then sell gold at a lower price than the formal market while still earning high margins.

Reuters reported that after the duty hike, Indian gold dealers feared an increase in smuggling because grey-market margins widened sharply.

This creates multiple problems:

This is a classic case where a policy designed to reduce imports may end up shifting imports from the formal channel to the informal channel.

Impact on MSMEs and Employment

The gems and jewellery sector is highly labour-intensive. It supports artisans, small jewellers, exporters, traders, designers, refiners and manufacturing units.

The Gem & Jewellery Export Promotion Council has warned that higher duties can hurt MSME manufacturers, which form a large part of the sector’s ecosystem. Reports also mention concerns about liquidity pressure and higher working capital requirements for exporters and small manufacturers.

The likely impact on MSMEs includes:

1. Higher input cost.
2. Higher working capital requirement.
3. Reduced competitiveness against informal sellers.
4. Lower production if demand weakens.
5. Pressure on artisans and workers.
6. Higher compliance and financing burden.

This is important for GS Paper 3 because it connects external sector policy with employment and MSME development.

Impact on Jewellery Exports

India is not only a consumer of gold; it is also a major processor and exporter of gems and jewellery. If imported gold and silver become costlier, the input cost for jewellery exporters may rise.

This can affect India’s export competitiveness, especially against countries with easier access to raw materials or lower duties. If the government provides duty drawback, bonded warehousing or export-linked exemptions efficiently, some impact can be reduced. But if compliance becomes complex or working capital gets blocked, exporters may suffer.

This creates a policy paradox: a measure taken to reduce imports may also weaken value-added exports.

Inflation and Domestic Price Impact

After the duty hike, domestic bullion prices rose sharply. Reports noted that bullion prices in India rose by nearly 7% following the announcement.

For consumers, this means:

Reuters also reported record-level discounts in the physical gold market after the price spike, suggesting weak retail demand and disruption in physical bullion trading

Governance Dimension: Tax Transparency and Ease of Doing Business

The article also raises an important governance issue: complexity in customs notifications.

If the applicable duty rate can be understood only by reading multiple old notifications, amendments, exemptions and tariff entries, then it undermines tax certainty. This is a problem for businesses, importers, customs brokers, exporters and MSMEs.

For UPSC, this connects with:

1. Ease of doing business.
2. Transparent taxation.
3. Predictable regulatory framework.
4. Reducing compliance burden.
5. Minimising litigation.
6. Good governance in tax administration.

A simple and consolidated customs duty table would improve clarity. Complex tax drafting defeats the purpose of simplification.

Policy Debate: Government Logic vs Criticism

This is the heart of the Mains answer: the measure has a macroeconomic rationale, but its effectiveness depends on demand response, enforcement capacity and the availability of structural alternatives.

Historical Policy Lesson

India has used gold import duties several times to manage external-sector pressure. However, history shows that very high duties often create a smuggling incentive. In July 2024, India had cut duties on gold and silver from 15% to 6%, partly to reduce smuggling incentives. The 2026 hike reverses that direction due to renewed pressure from imports and external-sector concerns.

This makes the issue suitable for a UPSC question on the limits of tariff-based external sector management.

Broader Structural Issue: Why Indians Prefer Gold

The deeper issue is not merely import duty. It is India’s household savings behaviour.

Many households prefer gold because:

1. It is liquid.
2. It is socially accepted.
3. It is seen as safe.
4. It is easy to pledge for loans.
5. It protects against inflation.
6. It is outside complex financial systems.
7. It has emotional and cultural value.

Therefore, reducing gold imports requires more than higher duty. It requires stronger formal financial alternatives.

Way Forward

A balanced policy response should combine short-term external management with long-term structural reform.

A strong long-term approach would be to convert India’s household gold stock into a productive financial asset. Instead of merely discouraging gold imports, policy should encourage the mobilisation of existing domestic gold.

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