NextFin News - India's gold buyers are moving into cash. With 24-karat gold trading near ₹155,000 per 10 grams and a new 15% import duty layered on top, households and small jewellers are increasingly settling deals in unrecorded cash — often below the invoiced value — reviving the parallel market that policymakers were trying to kill.
The trigger is a policy reversal. On 13 May 2026, the government imposed a 10% basic customs duty plus a 5% agriculture cess on gold and silver imports, lifting the effective tax to 15% from 6% — the single largest one-step increase on record, and a full reversal of the July 2024 cut. Three days earlier, Prime Minister Narendra Modi had asked citizens to avoid buying gold for a year to conserve foreign exchange.
The price backdrop explains why the message found willing ears — and willing loopholes. Gold in India is up more than 80% since early 2025. On 3 September 2026, 24-karat gold touched ₹155,801 per 10 grams, a record; even after easing, it stood near ₹151,800 per 10 grams in late September. At those levels, the 9-percentage-point duty adds roughly ₹10,000–₹11,000 per 10 grams to the landed cost of every gram that enters through customs.
The policy is already biting — perhaps too much. Gold imports fell 57.75% year-on-year to $2.3 billion in August 2026, the sharpest decline among major import categories, according to Ministry of Commerce data released in mid-September. For the April–August period, gold imports still grew 3.38% to $17.47 billion, but the August collapse was the first full month in which the 15% duty hit landed cost.
Here is the paradox that defines the story: the duty is meant to save foreign exchange by discouraging imports, but gold demand in India is among the most price-inelastic in the world for weddings and festivals. Demand deferred is not demand destroyed. When the festival and wedding season peaks — Navratri, Dhanteras, Diwali, and the winter wedding window that runs into January — the buying does not vanish; it migrates. And the cheapest gold available is the gold that never crossed a customs counter.
The mechanism is simple. A buyer pays a portion of the price in cash, the jeweller invoices a lower value, and both sides split the tax saving — the 15% duty, the 3% GST, or both. No bill, no tax, no import record. For the buyer, the discount can be the difference between affording a bridal set and postponing it. For the jeweller, it keeps the till moving when footfall is thin.
The stakes are fiscal as well as behavioural. Customs revenue from gold imports reached a record ₹26,402 crore in FY25, up from ₹17,747 crore in FY24 — even after the duty was cut to 6%. A shift toward untaxed gold erodes that base precisely when the government is leaning on it.
The backdrop to the policy is a market already under strain. Jewellery demand in 2025 fell 24% to 430.5 tonnes, the lowest in nearly three decades excluding the pandemic year, as domestic prices surged 76.5% over the year. Investment demand rose to a record share of roughly 40% of total consumption in 2025, up from the usual quarter, as buyers shifted from ornaments to bars and coins. The World Gold Council expects total 2026 demand to land between 600 and 700 tonnes, down from 710.9 tonnes in 2025.
The duty is a blunt instrument against a cultural habit
Gold is not merely jewellery in India; it is the household balance sheet. Roughly 8% of India's merchandise imports in 2025 were gold, and the metal accounts for more than 5% of total imports by value. The current account deficit widened to $13.2 billion, or 1.3% of GDP, in the third quarter of FY26 from $11.3 billion, or 1.1%, a year earlier, and a large share of that deterioration came from precious metals — gold and silver imports grew 218.6% and 285.2% respectively in value terms in Q3 FY26.
Against that backdrop, the duty is rational. The rupee had depreciated more than 7% year-to-date by mid-May, hitting record lows every month from January to May 2026 and breaching 95 per dollar. Foreign-exchange reserves fell to $698.3 billion by 20 March 2026 from nearly $730 billion at the end of February, as gold valuations rolled over and the central bank defended the currency. Every billion dollars of gold imports notched off the ledger is a billion dollars of pressure lifted from the rupee.
But the blunt instrument meets a resilient habit. The World Gold Council estimates that combined jewellery and bar-and-coin demand will fall 50–60 tonnes in 2026, roughly 10% year-on-year, because of the duty hike. That is a meaningful contraction — but it leaves the bulk of demand intact. Metals Focus puts the pain earlier: Indian gold jewellery consumption fell 17% year-on-year in the first half of 2026. Note the distinction: 17% fewer grams, not 17% fewer rupees. At record prices, households spend more money for less metal. The revenue line at the jeweller can look healthy while the physical pipeline starves.
"While high prices undoubtedly support the value proposition of precious metal jewellery, and benefit sales revenue, that same price strength is eroding jewellery demand measured in fine weight terms," analysts at Metals Focus said.
That is the first crack in the policy logic. A duty measured in value terms catches the price spike but misses the gram shrinkage. The government collects more rupees per gram while fewer grams cross the border — and the grams that do not cross do not necessarily stay abroad.
The parallel market has a memory — and it is short
The strongest evidence that the cash market is the destination, not a sideshow, is history. Every previous duty spike has been followed by a smuggling spike, and the relationship is almost mechanical.
When the government raised the import duty from 10.75% to 15% in July 2022, gold seizures by enforcement agencies nearly doubled — from 2,172 kg in FY22 to 4,343 kg in FY23 — and climbed to a record 4,972 kg in FY24, even as official imports rebounded to $45.5 billion. Earlier cycles rhyme: in FY16, with imports at $31.8 billion, authorities seized 2,972 kg; after a dip to 1,520 kg in FY17, seizures rose to 3,329 kg in FY18 and 4,292 kg in FY19.
The counter-movement is just as clean. After the July 2024 duty cut to 6%, seizures fell to 2,600 kg in FY25 — nearly half the FY24 level — while gold imports surged to $58 billion. Lower duties shifted purchases back into formal channels. Higher duties are now doing the reverse.
This is not speculation about human nature; it is an observed elasticity. The smuggling margin is straightforward arithmetic. With the domestic price near ₹155,000 per 10 grams and the international price near $4,450 per ounce, landed cost with a 15% duty sits well above the global price. Any channel that skips the duty — whether through undervaluation, misdeclaration, or direct smuggling via the long land and coastline borders — carries a margin worth risking. Industry estimates have put the arbitrage at more than ₹1 million per kilogram even at lower duty levels; at 15% it is larger.
The geography is familiar: the western coast, the Gulf corridor, and the eastern land borders. Enforcement agencies are already warning that the May 2026 hike will require a renewed surveillance push at airports, ports, and land crossings. The warning is an admission: the state knows the channel is reopening.
The second-order effect — the tax base eats itself
The first-order effect of the duty is obvious: imports fall, the trade deficit narrows, the rupee gets relief. That is the story the government is telling. The second-order effect is what the government is not saying out loud.
A duty that pushes transactions underground does not just reduce imports; it reduces the taxable base. FY25 gold-import customs revenue was a record ₹26,402 crore. If even a modest share of demand migrates to untaxed channels — and the seizure history says it will — that revenue line contracts just as the fiscal need for it grows. The policy designed to protect foreign exchange can end up weakening the revenue that supports it.
There is a second transmission channel, quieter but structurally more important: the old-gold exchange. When new gold is expensive and taxed, households bring heirlooms to the counter. Industry bodies have said the duty hike will spur old-gold exchange and dampen fresh sales. Large retailers have rolled out cash-for-gold schemes ahead of the festive season. That recycled supply is tax-light — it never crosses customs, never pays the 15% duty, and competes directly with newly imported metal.
So the duty creates a substitution chain: new imported gold → old exchanged gold → untaxed cash gold → smuggled gold. Each link bypasses a layer of the formal ledger. The current account may improve on paper because the imports are not recorded; the underlying demand has simply moved to a part of the market the state cannot see.
"Precious metal jewellery retains cultural, bridal, gifting and investment appeal," Metals Focus said — a reminder that the demand is not dying, it is relocating.
The domestic price signal confirms the leakage. After the duty hike, the MCX spot price rose only 4% to 6%, far less than the 9-percentage-point duty increase, and domestic prices traded at a deep discount to the official landed price — widening from about $14 per ounce the week before the hike to nearly $150 per ounce. In a sealed market, a duty shows up one-for-one in the retail price. A discount that large means the market is being supplied from somewhere the duty does not reach.
The counter-thesis — maybe the policy is working exactly as intended
The strongest case for the government is the simplest: the numbers say it is working. Gold imports fell 57.75% in August. The current account deficit, while wider, would be worse without the duty. Seizure data for FY27 does not yet exist — it will lag by a year — so declaring a smuggling resurgence today is premature. From New Delhi's perspective, a nine-percentage-point duty that cuts import volume by more than half in a single month is a policy success, and the formal market's pain is an acceptable cost.
There is also a distributional argument. The buyers priced out of the market are disproportionately affluent — the households buying 50-gram bridal sets and investment coins, not the family buying a 2-gram pendant. If the duty curbs conspicuous consumption among those who can afford to wait, it is doing what moral suasion alone could not.
The answer to this counter-thesis is timing and leakage. The August import collapse came in a seasonally weak window — the inauspicious mid-May to mid-June period, when weddings pause — and before the full force of the October–January festive and wedding season, the year's peak buying period. The real test is whether demand reappears in that window without a matching rebound in official imports. If it does, the gap is the parallel market by definition.
The second answer is that "working" depends on the objective. If the goal is to reduce recorded imports, the duty works. If the goal is to conserve foreign exchange, it works only if the gold actually stops entering the country — not if it enters through a channel that does not get counted. A seizure statistic is a measure of enforcement success, not policy success; rising seizures alongside falling imports would mean the policy is failing and the police are cleaning up.
The cyclical read: the cash-market surge is a direct function of the price-duty spread. If global gold prices cool, or if the government rolls the duty back toward 6% as it did in 2024, the incentive collapses and demand flows back into formal channels — exactly as it did in FY25. This leg is mean-reverting.
The structural read: the whiplash itself is the regime change. Duties of 6%, 10%, 15%, 6%, 15% inside five years have taught every participant in the gold chain that the rules are temporary. Once a parallel market is rebuilt — the contacts, the routes, the jewellers willing to under-invoice — it does not fully disappear when the duty falls. It waits. Policy instability has converted a smuggling cycle into a smuggling option, permanently embedded in the market's playbook.
Who benefits: the informal jeweller and the cash-rich buyer, who capture the tax spread; smugglers and the logistics networks that move metal across borders; and, in the short run, the rupee, via lower recorded imports. Who is exposed: the organised retail chains that invoice fully and cannot discount; the exchequer, via a shrinking customs base; and the formal banking channel for bullion, whose licence delays and IGST uncertainties already cost it a month of imports earlier in 2026.
What to watch, with falsifying signals:
- FY27 customs revenue from gold imports. If it falls below FY25's ₹26,402 crore while official import volumes stay depressed, the parallel market is eating the base.
- Enforcement seizures for FY27. If they exceed the FY24 record of 4,972 kg, the parallel channel has reopened at scale.
- The festive-season import print for October–December 2026. If domestic demand stays strong but imports do not rebound, the gap is untaxed supply.
- The domestic premium or discount to landed cost. A persistent discount above $100 per ounce signals leakage; a return to parity signals a sealed market.
Base case: the festive season confirms the migration. Official imports stay soft, the cash market absorbs the slack, and seizures climb through FY27 — forcing a policy rethink toward a lower, harder-to-evade duty rather than a high, leaky one. Upside case: global gold prices fall sharply, the duty spread narrows, and demand returns to the formal channel without a smuggling surge. Downside case: prices keep rising, the rupee weakens past 95 again, and the parallel market becomes the default rather than the margin — turning a foreign-exchange measure into a foreign-exchange illusion.
The closing judgment: India's gold duty is a tax on the honest buyer. It raises the price of compliance until non-compliance is the rational choice — and then calls the resulting silence success.
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