Glittering Gains, Growing Gaps: India’s Surging Gold Demand and Its Economic Fallout

Why in News?

Indian households are increasingly diversifying their savings into equities and mutual funds, with their share in financial assets rising from 7% in 2022–23 to 15% in 2024–25. Despite this shift, the traditional preference for gold remains robust.

Gold imports surged to $12.07 billion in January, nearly tripling compared to December. A major contributor to this spike has been record inflows into gold exchange-traded funds (ETFs), signalling deeper financialisation of savings while simultaneously heightening pressure on India’s trade deficit and current account balance.

Background and Context

India’s Historical Affinity for Gold

India has consistently been among the world’s largest consumers of gold. Beyond investment, gold carries deep cultural and social significance, especially during weddings and festivals.

Post-2008 Gold Surge : Following the global financial crisis, high inflation, currency depreciation, and economic uncertainty drove households toward gold as a safe-haven asset. This resulted in sharp increases in imports, widening the current account deficit.

Policy Response : To curb rising imports, the government raised customs duties and introduced alternative instruments such as Sovereign Gold Bonds (SGBs) to channel savings away from physical gold.

Structural Import Dependence : India imports the bulk of its gold requirements, making domestic demand directly linked to foreign exchange outflows and trade imbalances.

Significance of the Issue

External Sector Stability:  Gold imports contribute significantly to the current account deficit (CAD), increasing vulnerability to global capital flow volatility.

Capital Allocation Efficiency:  High household investment in gold diverts resources from productive sectors like infrastructure, manufacturing, and entrepreneurship.

Fiscal Sustainability:  Schemes designed to reduce physical imports, such as SGBs, create contingent fiscal liabilities.

Currency and Exchange Rate Pressures:  Persistent gold imports increase demand for dollars, potentially exerting depreciation pressure on the rupee.

Behavioural Economics Dimension: Gold remains a preferred hedge against uncertainty despite expanding financial markets.

Key Components and Takeaways

1. Gold ETFs: From Niche Product to Investment Wave

What Are Gold ETFs?

Gold ETFs operate like mutual funds that invest in physical gold. Investors gain exposure without concerns over storage, purity, or security.

Record Inflows

According to the World Gold Council, Indian gold ETFs purchased a record 15.52 tonnes of gold in January — nearly matching the previous three months combined.

Data from the Association of Mutual Funds in India (AMFI) show net gold ETF inflows rose to ₹24,040 crore, exceeding equity mutual fund inflows for the first time.

Share in Imports : Gold ETF inflows accounted for 22% of total gold imports (₹1.1 lakh crore) in January. For silver, ETF-linked purchases formed 52% of total imports.

Structural Implication : While ETFs formalise savings, they still necessitate physical gold procurement, sustaining import pressures.

2. Sovereign Gold Bonds: A Policy Experiment

Scheme Design : Launched in 2015, Sovereign Gold Bonds offered returns linked to gold prices plus 2.5% annual interest.

Import Substitution : Investments equivalent to 147 tonnes of gold (₹72,274 crore) helped reduce the need for physical imports.

Rising Fiscal Burden : With increasing gold prices, annual payout liabilities reportedly approached ₹18,000 crore.

Discontinuation : Fresh issuances were discontinued in early 2024 due to mounting fiscal pressures.

3. Renewed Concerns Over Gold Investments

Safe-Haven Demand : Geopolitical tensions, global policy uncertainty, and uneven equity market performance have renewed gold’s appeal.

Trade Deficit Impact : The January import surge pushed India’s goods trade deficit close to $35 billion, underscoring macroeconomic risks.

Speculative Component : Analysts suggest a portion of ETF inflows may represent speculative positioning rather than purely defensive savings.

Macroeconomic Opportunity Cost : Excessive gold allocation limits domestic capital formation and long-term growth potential.

4. Lessons from the Past

2008–2013 Experience : Rising gold imports during this period worsened the current account deficit, prompting corrective measures.

Regulatory Intervention : The government and the Reserve Bank of India introduced import curbs and macroprudential steps to stabilise the external sector.

Policy Dilemma Today : Balancing household savings preferences with macroeconomic stability remains a key governance challenge.

Implications for the Indian Economy

Widening Current Account Deficit: Higher imports increase reliance on external financing.

Exchange Rate Vulnerability: Sustained dollar outflows can weaken currency stability.

Fiscal Trade-offs: Reviving bond-based alternatives reduces imports but raises fiscal liabilities.

Investment Pattern Shift: Gold ETF inflows surpassing equity inflows signal rising risk aversion among investors.

Long-Term Growth Concerns: Savings locked in non-productive assets constrain capital formation.

Challenges and Way Forward

Redesign Gold Investment Instruments: Develop fiscally sustainable alternatives to SGBs with calibrated returns.

Promote Gold Monetisation Schemes: Mobilise idle domestic gold holdings to reduce import dependence.

Strengthen Financial Literacy: Encourage diversified portfolios aligned with long-term wealth creation.

Calibrated Import Duty Policy: Balance revenue needs with smuggling risks.

Enhance External Sector Monitoring: Closely track precious metal-driven trade imbalances to maintain macroeconomic stability.