Gold buying for investment purposes also makes it easier to reduce imports of actual bullion

India is headed for a third consecutive year with a balance-of-payments deficit. A sharp increase in international oil prices as a result of the West Asian crisis and capital inflows too weak to fund our trade gap have combined to send the rupee down against the US dollar.

Gold is the third biggest item in the Indian import bill, after crude oil and electronics. Reduced gold imports because of either moral suasion or higher import taxes could ease some of this pressure on our external balance.

The chart shows how much Indians spent on gold imports over the past 15 years compared to the country’s total import bill. The data can help us get a broad estimate of how much ‘excess gold’ came into India in 2025-26.

Gold imports as a percentage of total imports were in double digits during the years of the ‘taper tantrum’ more than a decade ago. That number came down once the economy stabilized, and the government felt comfortable enough to cut import duties on gold in its July 2024 budget. Gold imports as a percentage of total imports are still not as high as they were during the taper tantrum, but clearly rising.

Gold imports as a proportion of total imports averaged 6.9% between fiscal years 2013-14 and 2023-24. They were 2.4 percentage points higher in 2025-26. If we assume this to be a measure of ’excess gold’ imports, then it means that Indians spent about $18.6 billion more than usual on the yellow metal in those 12 months.

How significant is that number? It is nearly half the estimated current account deficit of almost $36.2 billion that India is expected to report for the previous fiscal year. It is also more than a fifth of the expected $85 billion current account deficit in the current financial year.

These are not insignificant numbers. It is thus no surprise that the government has tried to bring down gold imports as part of its defence of the Indian rupee.

The reason I have chosen to focus on a measure of excess demand for gold rather than total gold imports is because it is very unlikely that gold imports will drop to zero, given the multiple uses of the yellow metal as an industrial good, a consumption good and an investment asset.

However, even though they are useful in times of trouble, controls on gold purchases are bound to falter in the long run. Successive Indian governments have tried to clamp down over the past many decades, with little success.

The answer then lies in altering consumer behaviour through incentives rather than fiat. And for that, we need an understanding of why Indians buy gold in such large quantities in the first place.

Previous research on demand for gold in India suggests that the two big reasons people buy this precious metal are rising income and economic uncertainty—the prosperity and hour of need that I.G. Patel had mentioned in his 1958 essay.

Economic uncertainty includes the Indian currency’s loss of purchasing power in terms of inflation at home plus an exchange rate depreciation on the external front. However, the recent spurt in gold demand came at a time when the Indian economy was growing rapidly even as inflation was under control.

This suggests that the spurt in gold-buying in the past two years was investment demand driven by rising prices. A recent analysis by Kavita Chacko, an economist with World Gold Council, shows that the demand for gold bars and coins (62 tonnes) in the first quarter of 2025-26 was nearly equal to jewellery demand (66 tonnes), while inflows into gold exchange-traded funds were at a record high.

The upshot: It is likely that the $18.6 billion of excess gold demand in the previous financial year was in response to rising prices, or for financial returns, rather than as a hedge against inflation.

One suggestion that has been doing the rounds is that the government should consider relaunching the sovereign gold bonds (SGBs) that were discontinued because of their rising fiscal burden.

Will such a move meaningfully save foreign exchange?

Here is a quick calculation. Total SGB issuance over 10 years was equivalent to 147 tonnes of gold, or 14.7 tonnes a year. At current prices, that is $2.1 billion a year, a small number compared to the extent of the challenge.

The author is executive director at Artha India Research Advisors.