The 2013 ghost returns: Will higher gold duties actually restrict imports or just fuel the grey market?

Prime Minister Narendra Modi’s dual-pronged attack on India’s gold obsession has sent shockwaves through the jewellery industry and the bullion market, reviving the "ghost of 2013" as the government moves aggressively to defend the rupee and conserve foreign exchange reserves.

Following a public call for a year of austerity by delaying jewellery purchases, the government today hiked the effective import tax on gold and silver from 6% to 15%. The impact was instantaneous: MCX gold June futures jumped by Rs 9,000 to hit Rs 1.62 lakh per 10 grams, a 6% jump, while jewelry stocks including Kalyan Jewellers, Thangamayil, and Sky Gold plunged as much as 7%.

Déjà Vu: The 2013 Playbook Is Back

The sudden policy shift has drawn immediate parallels to the 2012-13 crisis. Jefferies analyst Vivek Maheshwari noted that the Prime Minister’s call "brings back memories of FY12-13," a period when policymakers utilized a series of regulatory tightening measures to limit Current Account Deficit (CAD) risk.

"The intent is to temper discretionary USD outflows and reduce the risk of CAD widening during an external shock," Maheshwari stated, pointing out that during the previous crisis, the rupee depreciated by approximately 20% between January and September 2013.

However, seasoned market observers warn that the move may be a "blunt instrument" that fuels the grey market rather than solving the underlying problem.

Also Read | Kalyan Jewellers, Titan, other jewellery stocks crash up to 6% as Centre hikes gold customs duty to 15%

Sachin Sawrikar, Founder and Managing Partner at Artha Bharat Investment Managers, pulled no punches. "The sharp jump in effective import duty on gold and silver, from 6% to 15%, is a blunt instrument that history tells us rarely achieves its intended purpose," he said. "India's appetite for precious metals is structural, not cyclical; it is woven into savings culture, festive demand, and portfolio behaviour across hundreds of millions of households. When the price of the legal channel rises this steeply, a well-established informal trade simply fills the gap."

Sawrikar pointed directly to the 2013 precedent: duty hikes then drove an estimated surge in gold smuggling even as official import data showed a decline. "The forex savings the government hopes to achieve may prove largely illusory, while consumers end up paying a premium, jewellers face margin pressure and compliance costs, and enforcement agencies are stretched further."

The duty hike is understandable as a short-term signal, but it risks being a policy that looks good on paper and leaks badly in practice, he warned.

India's gold imports surged past $50 billion in each of FY12 and FY13, with volumes exceeding 1,000 tonnes. The current account deficit peaked at around 6.8% in December 2012, and the rupee depreciated nearly 20% between January and September 2013. Then-Finance Minister P. Chidambaram made a strikingly similar public appeal to households in June 2013, followed by a cascade of interventions: customs duty hikes from 2% to 15%, export-linked import restrictions, bans on gold metal loans, and a prohibition on gold coins.

Maheshwari cautioned that while the organised jewellery sector, particularly Titan, is far better positioned today than it was a decade ago, "share price volatility may still remain high."

Also Read | India raises gold, silver import duty to 15% to curb imports, support rupee amid West Asia crisis

Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities, urged investors not to misread the domestic price surge. "What we are seeing in domestic prices today is a mechanical re-pricing to a new import parity, not a fundamental rally. The duty is now a fixed cost embedded in the price." From here, he argued, Indian gold and silver prices will continue to be driven by what they have always been driven by — the international LBMA spot price, the USD/INR exchange rate, and the domestic premium or discount over import parity.

Banerjee characterised the duty hike and the PM's appeal as "a single, coordinated effort to conserve India's foreign exchange reserves through an extraordinary external environment." On the rupee, he noted that USD/INR around 95.60 reflects the cumulative strain of elevated crude prices and the West Asia geopolitical premium, and that the duty-led compression of gold imports should help moderate further weakness — though the currency's trajectory "will be shaped less by gold and more by the trajectory of crude and the West Asia situation."

His structural view on gold, however, remains bullish. "The global de-dollarisation theme, central bank buying, and currency-debasement hedging are all multi-year drivers that operate independently of any domestic tax decision." Kotak expects international gold to move toward $6,000 an ounce over the next 12 to 18 months.

Macro Logic, Behavioural Limits

The macroeconomic rationale for the government's intervention is straightforward, analysts agree, even if its efficacy is doubted.

Jateen Trivedi, VP Research Analyst at LKP Securities, said Modi's remarks should be viewed "primarily from the perspective of India's macroeconomic stability and import management," given the simultaneous pressure of higher crude prices, US–Iran geopolitical tensions, and a weakening rupee. "Gold imports require large outflows of foreign currency, mainly dollars, and at a time when policymakers are trying to stabilise the rupee and control external sector risks, discouraging non-essential imports becomes an important strategy."

But Trivedi was equally clear on the limits: "The appeal is unlikely to significantly change long-term Indian demand for gold because gold remains deeply linked to savings, investment, and cultural buying patterns." In the short term, it may slow discretionary jewellery purchases and create cautious sentiment, but the structural demand story remains intact.

Deveya Gaglani, Senior Research Analyst at Axis Direct, echoed the point. "India remains one of the largest importers of gold, and higher imports lead to significant dollar outflows, pressure on the rupee, and strain on the country's forex reserves. However, the statement is unlikely to have a major impact on gold prices, as gold is an internationally traded commodity where India acts as a price taker rather than a price maker." She recommended investors maintain around 10% portfolio allocation to gold as a hedge against ongoing global uncertainty.

For Sawrikar, the real failure is one of policy imagination. "A more durable solution to managing the current account impact of precious metal imports lies in improving domestic gold monetisation schemes and developing liquid gold-backed financial products — instruments that channel demand without requiring physical import at all."

That conversation, however, is not the one India is having today. Instead, with jewellery counters bracing for a demand slowdown, bullion traders recalibrating margins, and compliance teams at border agencies preparing for the familiar surge in undeclared shipments, the ghost of 2013 is firmly back in the room.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)