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Indians and our love for gold is a historic phenomenon. From weddings to hardships, gold has played an integral role in our lives. It has long been a symbol of wealth and luxury, but most importantly, it represents a sense of safety. Just one glance through our markets would convince you as such, in a busy market place you could count a number of shops providing cash for services, highlighting its liquidity. Gold is the ultimate source of capital when everything else fails. When previous generations bought gold, they were not merely acquiring status symbols to flaunt; they were building a cushion against hard times and harder choices. This affinity stems not from a sense of greed or ostentatious luxury as policymakers have often lamented while labeling it “unproductive”. But it is rather deeply ingrained in our nature, tradition, and culture. Today, India’s jewelry industry contributes 7% to our economy and 10% to 12% of our overall exports. Yet, the persistent splinter under the government’s fingernail remains the fact that gold accounts for 8% to 11% of our total imports.
So, what can the state do about our gold import bill? Historically, the instinct has been to ban it altogether. This was the ‘glittering’ idea brought forward by Prime Minister Indira Gandhi and then-Finance Minister Morarji Desai. The Gold Control Act of 1968 was envisioned to curb the “wasteful” expenditure of precious foreign currency. It prohibited citizens from owning gold in the form of bars and coins, and mandated that existing holdings of bar/coins be converted into jewelry and declared to the authorities.
The restrictions were draconian: goldsmiths were barred from owning more than 100 grams of gold, licensed dealers were capped at 2 kilograms, jewelry purity was limited to 14 carats, and unrecorded transactions were criminalized. With such a direct interventionist approach, one might assume the Indian government had solved the pesky issue of gold imports.
It did not. To the surprise of no one, except perhaps the advocates of the License Raj. The Act was a spectacular failure. Gold smuggling exploded, corruption flourished, the livelihoods of legitimate business owners were decimated, and the groundwork was laid for organized syndicates to smuggle gold.
Furthermore, the primary objective of saving foreign reserves failed entirely, as evidenced by the subsequent Balance of Payment crises in 1973, 1980-81, and 1990-91. Fortunately, the Act was repealed in 1990.
Throughout this decades-long ordeal, one thing remained intact: the Indian obsession with gold. Smugglers thrived simply because the government could not deter the collective will of the population.
Since liberalization, institutions have significantly softened their stance. Import duties reached a record low of 2% before beginning a steady climb in 2013, eventually peaking at 15%.
However, just as history informed us, these higher tariffs coincided with surging reports of gold smuggling, prompting the government to slash the duty back down to 6% in the 2024 Union Budget to deter illicit trade.
Alongside tariff adjustments, the government has introduced modern initiatives to manage the trade deficit, such as Gold ETFs, Sovereign Gold Bonds, and Gold Monetisation Schemes.
These are commendable efforts to financialise the asset and divert households away from physical accumulation. Yet, amid a depreciating rupee and soaring global gold prices, the physical demand remains, forcing the government’s hand yet again.
With close to six decades of institutional knowledge since the introduction of the Gold Control Act, one truth has been firmly established: our partiality toward gold is not an “unproductive” use of wealth.
It is an intergenerational hedge against uncertainty and unexpected calamity. It may not always be the most financially sound move on a spreadsheet, but it is an enduring, collective decision made by the Indian public.
It is this fundamental instinct that the government must work to manage, not to curb. Decades of heavy-handed legislation could not fix the trade deficit, and mere appeals to postpone gold purchases certainly will not dent it. This demand for gold is, and will remain, an enduring legacy of the Indian experience.
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