{"id":36685,"date":"2026-05-30T15:11:11","date_gmt":"2026-05-30T09:41:11","guid":{"rendered":"https:\/\/gjepc.org\/solitaire\/?p=36685"},"modified":"2026-06-02T15:15:00","modified_gmt":"2026-06-02T09:45:00","slug":"indias-gold-dilemma-restrict-reform-or-reimagine","status":"publish","type":"post","link":"https:\/\/gjepc.org\/solitaire\/indias-gold-dilemma-restrict-reform-or-reimagine\/","title":{"rendered":"India\u2019s Gold Dilemma: Restrict, Reform or Reimagine?"},"content":{"rendered":"

Gold has long been treated as India\u2019s economic problem, yet history suggests it has often been part of the solution, argues bullion analyst <\/em>Sanjiv Arole<\/strong>.<\/em><\/p>\n

Success has many fathers, while failure seeks scapegoats. In India, over the decades, gold has often borne the blame for economic or geopolitical crises. In 1962, India was dealt a devastating military defeat by China that caused widespread sufferings, so severe was the economic fallout that the then government asked for donations from the general public. People, rich as well as the poorest opened their savings as well as even personal gold (in hundreds of kgs) to help the government to tide over the crisis. While the cash was utilised, the gold was kept in vaults.<\/p>\n

Yet, despite gold aiding the nation, the subsequent Gold Control Act crippled the bullion trade for nearly three decades. Gold ownership and imports were heavily restricted, pushing the industry underground and fuelling rampant smuggling and hawala trade. India\u2019s restrictive policies also helped Dubai emerge as a major global gold trading hub. In effect, an industry that responded to the nation\u2019s call in its hour of need was later penalised.<\/p>\n

Ironically, it was the then socialist Finance Minister Madhu Dandavate who abolished the Gold Control Act in 1990 after nearly 28 years of restrictions. Soon after, the government led by Prime Minister P. V. Narasimha Rao, with Finance Minister Dr. Manmohan Singh steering economic policy, confronted a severe 1991 balance of payments crisis, with foreign exchange reserves reportedly sufficient for barely two weeks of imports. The government responded with sweeping reforms, including a roughly 22% rupee devaluation in two stages. Once again, gold became the backstop. The RBI pledged 60 tonnes of gold overseas to avert a sovereign default, of which 47 tonnes were redeemed within months.<\/p>\n

From Liberalisation to Policy Reversal<\/strong><\/p>\n

Liberalisation reopened the gold sector through phased reforms, from Special Import License (SIL) to Open General License (OGL) and eventually free imports. Import duties were gradually reduced over the next 15 years, falling to as low as Rs.100 per 10 grams on standard bullion bars after 2006. The tola bar disappeared, smuggling lost economic viability, the hawala premium on the rupee nearly vanished, and the parallel economy took a major hit. India also re-entered precious metals forward trading. During the 1997 East Asian currency crisis, privately held gold, particularly in rural India, acted as a financial cushion, helping the country withstand regional turmoil that destabilised several larger Asian economies. As a senior World Gold Council official noted at the time, India benefited from citizens holding gold privately, providing an informal reserve buffer when central banks globally were still selling gold, before the 1999 agreement capped official sales at 400 tonnes annually, or 2,000 tonnes over five years.<\/p>\n

The 2008 sub-prime mortgage crisis, triggered by the collapse of the US housing market and widespread defaults on high-risk loans, evolved into a global financial meltdown as banks and financial institutions transmitted the shock through leveraged markets. Major institutions, including Lehman Brothers, collapsed. Precious metals benefited sharply as investors rushed to safe-haven assets. Supported by quantitative easing from the US Federal Reserve and other central banks, gold, already in an uptrend since 2001, entered a powerful bull market, reaching a then record high of $1,926 per ounce in September 2011. Silver surged to nearly $50 per ounce in April 2011, close to its 1980 peak, while platinum had already crossed $2,200 per ounce in 2008.<\/p>\n

In India, low import duties had weakened smuggling and largely eliminated hawala trading. But soaring prices gave rise to round-tripping, where gold and other high-value goods were exported, often to Dubai, and re-imported to exploit price arbitrage, export incentives and cheaper financing. After global gold prices softened post-2012, India\u2019s strong economy and favourable monsoons drove gold demand above 1,000 tonnes in two successive years, sharply widening the current account deficit.<\/p>\n

The government responded with steep policy tightening. Import duty on gold jumped from Rs.100 per 10 grams to 10%, and then 12%, within months. Then Finance Minister P. Chidambaram also introduced the 80:20 import-export scheme. While intended to curb imports, the measures quickly revived unofficial trade and strengthened the parallel economy. A sector that had been moving closer to global trading norms was pushed backward once again, with gold cast as the culprit for broader macroeconomic imbalances. The succeeding government scrapped the 80:20 scheme in 2014, but retained elevated import duties, added 3% GST from 2017, and tightened regulatory oversight of the bullion trade.<\/p>\n

Changing Global Order<\/strong><\/p>\n

After a brief but sharp correction that lasted until 2015, gold resumed its bull run through the next decade, averaging $3,431.54 per ounce in 2025, compared with an average of $1,160 per ounce in 2015. LBMA analysts forecast an average gold price of $4,741.97 per ounce for 2026. The rally was driven by a mix of geopolitical conflicts, including the Ukraine war, conflicts involving Israel across Gaza, Lebanon and Iran, alongside broader global flashpoints. Rising US debt, inflation concerns, expectations of lower interest rates, economic uncertainty and stress in financial systems also underpinned prices.<\/p>\n

Covid-19, successive rounds of quantitative easing, tariff disputes and resulting market volatility further strengthened gold\u2019s appeal as a safe-haven asset. Gold eventually touched an all-time high of around $5,600 per ounce in late January 2026, while silver peaked near $121 per ounce during the same period.<\/p>\n

However, the prolonged US-Israel-Iran conflict created an unusual market dynamic. Gold initially surged as tensions escalated, but as the conflict dragged on and oil prices climbed beyond $100 per barrel towards $125, gold retreated to around $4,300 per ounce, while silver traded in the $70-75 range after sharper declines. The market has since displayed a paradoxical pattern: precious metals rising when prospects of ceasefire and stability improve, and weakening when renewed military escalation, missiles and drone attacks intensify uncertainty.<\/p>\n

Overall, gold demand remains strong as investors, especially in the West, increase allocations to the metal. Rising inflows into gold and silver ETFs suggest a shift away from equities, currencies and even cryptocurrencies. There is also growing scepticism about relying excessively on the US dollar. Sustained gold buying by central banks in emerging markets, including Russia, China and India, underscores gold\u2019s expanding role in the global financial system.<\/p>\n

In India, one persistent myth about gold is that consumers, especially women, never part with their holdings. The reality is different. Across rural and semi-urban India, particularly in the south, gold is routinely pledged during financial stress and redeemed later. This practice extends beyond farmers to the urban working and middle classes.<\/p>\n

Kerala illustrates the scale. NBFCs in the state reportedly hold about 381 tonnes of gold as collateral, valued at over Rs.4.6 lakh crore, exceeding the official gold reserves of several European countries. Banks, too, have expanded gold loan exposure aggressively. Given this reality, any effective gold monetisation strategy should leverage NBFC networks to mobilise privately held gold, rather than assume household gold remains permanently locked away.<\/p>\n

Debunking the Myths Around Gold<\/strong><\/p>\n

Another enduring myth is that gold is a \u201cdead asset\u201d because it does not generate interest. Yet gold\u2019s role has historically extended far beyond that of a passive investment. For centuries, it functioned as a quasi-currency, and until a few decades ago, global monetary systems remained linked to gold through variants of the gold standard.<\/p>\n

The later shift to a dollar-centric global trading system, reinforced by oil being priced in US dollars, cemented the dominance of the USD. However, growing efforts to diversify away from the dollar point to gold\u2019s continuing relevance. Recent geopolitical tensions, including the conflict involving Iran and its implications for US-Gulf alliances, have renewed questions around reserve security, currency dependence and the enduring role of gold in the global financial order.<\/p>\n

In India, gold has repeatedly acted as a financial backstop, from the 1962 China war to the 1991 balance of payments crisis that triggered economic liberalisation and decades of growth. It has also provided households with resilience during Covid-19, floods, droughts and other crises.<\/p>\n

Yet, as in 2013, policymakers have again turned to higher import duties on gold and silver to address current account and balance of payments pressures. Critics argue this risks undoing years of reforms aimed at integrating India with the global gold ecosystem, including GIFT City initiatives, FTAs and the 2024 duty reductions. History suggests that high duties do not curb India\u2019s appetite for gold but instead revive unofficial trade and push parts of the industry underground, affecting livelihoods across a sector that employs lakhs of artisans.<\/p>\n

Rather than relying on open-ended duty hikes, alternatives could include targeted short-term measures, enabling bullion exports during periods of overseas price premiums, and revisiting domestic resource development. Repeated failures of gold monetisation schemes and the fiscal burden of Sovereign Gold Bonds have also revived calls for deeper mining reforms. With bureaucratic hurdles discouraging both global and domestic miners, expanding India\u2019s own gold and precious metals production may offer a more durable long-term solution.<\/p>\n

India\u2019s Policy Crossroads<\/strong><\/p>\n

India faces a strategic choice: return to restrictive approaches reminiscent of the Gold Control era, or adopt a more forward-looking gold policy. A key question is whether the country will meaningfully develop its underground mineral wealth, including gold and diamonds, by reforming mining policies and incentivising exploration. The contrast with China is striking: from producing roughly 150 tonnes of gold three decades ago, it has become the world\u2019s largest gold producer.<\/p>\n

With shifting Gulf dynamics and uncertainty around traditional trading hubs such as Dubai, India has an opportunity to strengthen its position in the global gold and diamond trade. At the same time, evolving geopolitical and currency trends may challenge the dominance of the US dollar, potentially leading to a more multipolar trade environment. In such a scenario countries could trade in various currencies and after a shakeout trade in a single currency or a clutch of currencies. Then, would India like to trade in a currency like the Chinese Yuan or any other currency backed by gold? One thing is almost certain: that gold will be a key player in the new global economic order and a cornerstone in the financial markets. The time is ripe for India, one of the largest gold consumer countries, to truly back gold to move forward.<\/p>\n

\n

Disclaimer<\/strong><\/p>\n

The views expressed in this article are those of the author and do not necessarily reflect the views of the GJEPC.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Gold has long been treated as India\u2019s economic problem, yet history suggests it has often been part of the solution, argues bullion analyst Sanjiv Arole. Success has many fathers, while failure seeks scapegoats. In India, over the decades, gold has often borne the blame for economic or geopolitical crises. In 1962, India was dealt a…<\/p>\n","protected":false},"author":9,"featured_media":36686,"comment_status":"closed","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[80,100],"tags":[],"thb-sponsors":[],"class_list":["post-36685","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-gold","category-in-focus"],"acf":[],"yoast_head":"\nIndia\u2019s Gold Dilemma: Restrict, Reform or Reimagine? - Solitaire magazine is a International jewellery magazine - India\u2019s leading B2B gem and jewellery magazine<\/title>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/gjepc.org\/solitaire\/indias-gold-dilemma-restrict-reform-or-reimagine\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"India\u2019s Gold Dilemma: Restrict, Reform or Reimagine? - Solitaire magazine is a International jewellery magazine - India\u2019s leading B2B gem and jewellery magazine\" \/>\n<meta property=\"og:description\" content=\"Gold has long been treated as India\u2019s economic problem, yet history suggests it has often been part of the solution, argues bullion analyst Sanjiv Arole. 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