The grey market for gold is thriving despite continuing crackdown from the Directorate of Revenue Intelligence (DRI). In fact, India’s bullion market is facing growing disruption from smuggled gold, and industry executives are saying that legitimate dealers and jewellers are being squeezed.Illegally sourced gold is being offered at discounts of as much as Rs 8,000 per 10 grams, according to an ET report. The widening price difference has emerged after the government raised the gold import duty to 15% from 6% in May, making the grey market more attractive.
Over 100 tonnes gold may be smuggled in
Industry estimates suggest that more than 100 tonnes of gold could be brought into India through illegal channels this year.The increase in smuggling comes at a time when the Directorate of Revenue Intelligence has intensified its action against organised gold smuggling networks.According to the latest government data released on July 25, the agency seized more than 27 kg of foreign-origin smuggled gold and arrested 12 people in a series of intelligence-led operations carried out across the country.“Illegal gold import does not help genuine traders and only helps fly-by-night operators. The current discount on gold is a clear indication that the grey market is active,” a senior executive of India Bullion & Jewellers Association told the financial daily.The latest increase in smuggled gold also reflects a trend identified by the World Gold Council (WGC), which has noted that the higher import duties on gold can increase the price gap between gold in India and international markets, which in turn creates greater incentives for smuggling.A similar pattern was seen after the government raised the duty by 4 percentage points in early 2013. Unofficial gold imports surged nearly sevenfold, reaching 70 tonnes in the first quarter of 2014 compared with around 10 tonnes in the corresponding quarter of 2013.The illicit trade continued even after the duty rate settled at 10% between late 2013 and mid-2019. During this period, unofficial imports averaged around 34 tonnes every quarter, pointing to the ability of established smuggling networks to continue operating.Rajesh Rokde, chairman of All India Gem & Jewellery Domestic Council, said, “Illegal entry of gold is hurting the organised trade most. Rather than increasing duty on gold, efforts should be made to increase exports. The government should consider bringing down the duty on gold to 5%.”Another spike followed the government’s decision to increase the effective gold duty to 15% in July 2022 from 10.75%. Unofficial imports climbed to around 50 tonnes by the end of that year, compared with 17 tonnes in the second quarter of 2022, and continued to remain high through a large part of 2023.
Gold import duty hike
In May this year, the government increased the import duty on gold and silver to 15% from 6%. The move was aimed at discouraging overseas purchases of the precious metals and reducing pressure on the country’s foreign exchange reserves.The higher import taxes were aimed at weighing on demand in India, the world’s second-largest consumer of precious metals. At the same time, the move was expected to help reduce the country’s trade deficit and provide some support to the rupee, which has been among Asia’s weakest-performing currencies.Industry officials, had at that time also cautioned that the higher duties could bring gold smuggling back into focus. The illicit trade had declined after India lowered tariffs in mid-2024.Under the new structure, gold and silver imports attract a 10% basic customs duty along with a 5% Agriculture Infrastructure and Development Cess (AIDC), taking the effective import tax to 15% from 6%.Prime Minister Narendra Modi has appealed to people to stay away from gold purchases for a year in an effort to safeguard foreign exchange reserves. India relies on imports for almost all of its gold consumption.Demand for gold in India, especially for investment, has increased amid the recent rise in prices and negative returns from equities over the past year.According to the World Gold Council, inflows into India’s gold exchange-traded funds (ETFs) jumped 186% year-on-year during the March quarter to a record 20 metric tons.