India’s Gold Tariff Is Moving Demand Off the Books

India’s attempt to suppress gold imports is starting to redirect trade rather than eliminate it.

The country’s 15% import duty, raised from 6% on May 13, has combined with a 3% goods and services tax to create an 18% price wedge between officially imported bullion and metal entering outside formal channels. World Gold Council estimates cited by Reuters indicate unofficial inflows could exceed 100 tonnes in 2026, while enforcement agencies seized 160.91 kilograms between May 13 and June 30 - almost twice the amount confiscated in the preceding six weeks.

That is a material shift for the world’s second-largest gold market. India’s net gold imports fell 23% from a year earlier to 98.1 tonnes in the June quarter, the weakest second-quarter total since the pandemic disruption of 2020. Overall demand declined 6% to 131.4 tonnes as jewellery purchases weakened.

The official numbers make the tariff look effective. The market plumbing tells a more complicated story.

Gold entering through undeclared routes does not disappear from Indian consumption. It bypasses banks, nominated importers, refiners and organised retailers, depriving the government of revenue and making the true demand picture harder to measure. The tariff therefore risks converting a balance-of-payments intervention into a market-share transfer from formal businesses to smuggling networks.

History supports that concern. World Gold Council analysis found a positive 0.52 correlation between India’s gold duty and unofficial imports, excluding the pandemic years. After a 2013 duty increase, estimated unofficial flows rose sevenfold within a year, from about 10 tonnes in the first quarter of 2013 to 70 tonnes in the first quarter of 2014. When the duty was cut to 6% in July 2024, unofficial inflows fell close to zero.

The latest reversal is unusually sharp. The nine-percentage-point increase was the largest single gold-duty rise on record and fully unwound the 2024 cut. It came as the rupee weakened and policymakers sought to conserve foreign exchange amid elevated energy costs and geopolitical pressure.

The domestic market has not absorbed the full tax increase cleanly. Immediately after the hike, local gold traded at discounts approaching $150 an ounce to the duty-adjusted landed price as weak seasonal demand, pre-tariff inventory and recycled jewellery created excess supply. The discount had narrowed to about $25 by mid-June, but the gap showed how quickly formal pricing can detach from the theoretical import cost.

India’s June gold imports were estimated at 25 to 30 tonnes, down 39% from May. The World Gold Council expects the duty increase alone to reduce jewellery, bar and coin demand by 50 to 60 tonnes this year, or roughly 10%. Smaller retailers face the greatest pressure because they have less inventory flexibility and compete most directly with cash-based informal channels.

The international price offered little directional cover over the latest 24 hours. Samarium’s gold series rose just $2.51, or 0.06%, from $4,037.59 to $4,040.10 an ounce between 08:59 UTC on July 29 and 07:59 UTC on July 30. Yet the metal traded between $4,004.54 and $4,105.65, a $101.11 range that underscores how much local taxes and currency moves can matter even when the global closing change is negligible.

The policy question is no longer whether higher duties can reduce recorded imports. They already have. The harder test is whether India can keep unofficial supply below the fiscal and enforcement cost of the tariff.

The next evidence will come from second-half festival and wedding demand. If buying recovers while official imports remain depressed, widening local premiums and seizure volumes would suggest consumption has shifted channels rather than vanished. A stable domestic discount and weak retail volumes would instead indicate that high prices and the tariff have genuinely destroyed demand.

For now, India has made its formal gold market smaller. It has not yet proved that it has made the country’s appetite for gold smaller with it.