India’s Gold Dependence: From Physical Imports to Financial Assets

Why in News?

Rising investor preference for gold—particularly through Gold Exchange Traded Funds (ETFs)—has renewed policy debate on India’s long-standing dependence on gold imports and their implications for the current account deficit (CAD), foreign exchange reserves, and macroeconomic stability.

Background & Context

India has historically been one of the world’s largest consumers and importers of gold, despite negligible domestic production. Gold occupies a unique position in Indian society—serving simultaneously as a cultural asset, a store of value, and an informal financial instrument.

Over the decades, sustained gold imports have exerted pressure on India’s balance of payments, particularly during periods of high global prices or economic uncertainty. Recognising these risks, successive governments have attempted to shift household savings from physical gold to financial gold, though with mixed success.

Why India Imports So Much Gold?

India’s structural dependence on gold imports is driven by a combination of socio-cultural, economic, and financial factors.

Cultural and Social Factors

• Gold is deeply embedded in Indian traditions, especially weddings, festivals, and religious ceremonies.
• It is perceived not merely as a luxury good but as a symbol of prosperity, security, and social status.
• Household demand remains relatively inelastic, even during economic slowdowns.

Gold as a Preferred Store of Value

• In rural and semi-urban areas, gold is often preferred over financial instruments due to:
  • Limited financial literacy
  • Distrust of formal financial markets
  • Ease of liquidity
• Gold is widely treated as an inter-generational asset, reinforcing long-term demand.

Hedge Against Inflation and Uncertainty

• During periods of high inflation, currency volatility, or weak equity market performance, gold functions as a safe-haven asset.
• Historically, whenever equity returns have been subdued or global uncertainty has risen, gold demand in India has increased.

Limited Alternatives for Long-Term Savings

• Pension and formal retirement savings penetration remains low.
• Risk-averse households often find gold more reliable than equities or debt instruments.
• This structural preference leads to sustained imports, adversely impacting the current account balance.

Macroeconomic Implications of High Gold Imports

• Worsens the current account deficit (CAD)
• Increases pressure on foreign exchange reserves
• Heightens vulnerability to external shocks
• Limits domestic capital formation, as savings are locked in unproductive physical assets

Steps Taken by the Union Government to Curb Gold Imports

Recognising the macroeconomic risks, the government has adopted a multi-pronged policy approach.

Import Duty Measures

• Higher customs duties on gold imports to discourage excessive physical consumption.
• Aimed at reducing foreign exchange outflows.
• However, past experience shows that steep duties can encourage smuggling, limiting effectiveness.

Promotion of Financial Gold Instruments

• Introduction and expansion of Gold ETFs and Sovereign Gold Bonds (SGBs).
• These instruments provide exposure to gold prices without requiring physical imports.
• SGBs also offer:
  • Periodic interest
  • Capital gains tax benefits (on maturity)

Gold Monetisation Scheme (GMS)

• Encourages households and institutions to deposit idle gold with banks.
• Mobilises domestic gold stocks for productive use.
• Reduces the need for fresh imports.

Deepening Financial Markets

• Expansion of mutual funds, digital payment systems, and small savings schemes.
• Efforts to improve financial inclusion and diversify household investment options.
• Despite these initiatives, behavioural and cultural preferences continue to dominate.

News Summary: Rising Shift Towards Financial Gold

• Indian equity markets delivered muted or negative returns in 2025, with declining overall market turnover.
• In contrast, gold ETFs recorded a sharp surge in inflows:
  • Net inflows of ₹25,566 crore between January and November 2025
  • Nearly three times higher than the same period in 2024
• Gold ETFs accounted for 3.2% of total net inflows into open-ended mutual fund schemes—the highest share in recent years.

Factors Driving the Recent Surge in Gold ETFs

• Global uncertainty due to geopolitical tensions and trade disruptions.
• Central banks worldwide increasing gold reserves to diversify away from the US dollar.
• A historic rally in global gold prices amid weak equity performance.
• Portfolio rebalancing by investors seeking stability and capital protection.

Risks and Cautions

• Experts warn that while gold’s long-term fundamentals remain strong, short-term gains may moderate.
• Part of the surge in ETF investments may be driven by “fear of missing out” (FOMO) among retail investors.
• Excessive concentration in gold could limit diversification benefits.

The Road Ahead: Balancing Stability and Financialisation

India’s challenge lies in managing gold demand without disrupting cultural practices. A gradual transition from physical to financial gold—through deeper markets, improved financial literacy, and stable macroeconomic conditions—remains the most sustainable path. Reducing import dependence will be critical for strengthening India’s external sector resilience.