When governments want consumers to buy less of something, they usually reach for taxes. India’s latest hike in gold import duties follows that familiar pattern. The assumption is straight for ward: make gold more expensive, demand will fall, imports will decline, and pressure on the rupee will ease. The problem is that gold demand in India has never been driven solely by price. It is tied to savings habits, cultural preferences, inflation concerns, and economic uncertainty.
Policies that ignore those realities rarely eliminate demand. More often, they distort the market around it. The government’s decision to raise import duties on gold and silver to 15 per cent is already pushing domestic prices sharply higher. Industry estimates suggest the revised tax structure could increase gold prices by nearly Rs 27,000 per 10 grams after duties and taxes. Policymakers hope that costlier imports will discourage excessive bullion buying and ease pressure on foreign exchange reserves amid currency volatility and geopolitical uncertainty.
But when price increases are driven primarily through taxation, markets often adjust in ways policymakers do not anticipate. India has tried this approach before, and the results were mixed at best. When import duties on gold were sharply raised in the past, official imports slowed, while smuggling surged. The widening gap between domestic and global prices created a strong incentive for illegal trade. That informal network weakened only after duties were reduced. The risk now is that the same cycle returns: higher taxes pushing consumers and traders towards unofficial channels rather than reducing demand itself. This is the central problem with using taxation to engineer consumer behavior. Demand does not disappear simply because prices rise.
Consumers adapt. Some buyers may shift toward lighter jewelry. Others may delay purchases temporarily. But a significant share of demand is likely to move toward grey markets, unofficial imports, or informal cash transactions where oversight is weaker, and consumer protections are absent. Legitimate businesses bear the burden while illicit networks gain an advantage. That distortion matters beyond the jewelry sector. India’s gold market supports a vast ecosystem of small retailers, craftsmen, refiners, and traders. When policy pushes activity away from formal channels, compliance weakens and transparency declines.
The result is often the expansion of the very parallel economy policymakers claim to oppose. There is also a broader behavioral reality policymakers tend to underestimate. In India, gold is not viewed purely as a luxury purchase. For many households, it functions as a store of value, a hedge against inflation, and a form of financial security. During periods of economic volatility or weak confidence in financial markets, demand for gold often rises because consumers see it as a symbol of stability. That is why attempts to suppress gold buying through taxation tend to have limited long-term effects. Consumers may change how they buy gold, but not necessarily whether they buy it.
Countries with lower barriers to precious metal imports generally see narrower gaps between official and unofficial markets, reducing incentives for smuggling. Singapore, for instance, removed investment grade precious metals from its goods and services tax framework more than a decade ago to strengthen transparent, formal bullion trading. The result was not a collapse in regulation, but a more competitive and formalized market environment. India risks moving in the opposite direction. Higher duties may temporarily curb official imports, but they also increase incentives for regulatory arbitrage. The larger the gap between domestic and international prices, the greater the reward for bypassing formal channels altogether. None of this means policymakers should ignore concerns around the trade deficit or currency pressures. Managing external vulnerabilities matters. But relying too heavily on punitive taxation often treats the symptom rather than the underlying issue.
Consumers move away from gold gradually when financial markets inspire greater confidence and alternative investments become more reliable and accessible. Behaviour changes more sustainably when better options emerge naturally, not when existing choices are priced out through punitive taxation. India’s latest gold duty hike reflects a recurring policy instinct: when markets become uncomfortable, raise the cost of participation. But history shows that consumers rarely respond in such predictable ways. When taxes become too distortionary, demand tends to move rather than disappear. And when that happens, the informal economy often grows faster than compliance.
(The writer is Indian Policy Associate, Consumer Choice Center)