India Gold Import Duty Hike Fuels Parallel Market

India’s gold import duty hike has revived the informal trade as the country enters its wedding and festival season. The government more than doubled import levies on gold and silver to 15%. Gold imports fell sharply in August, dropping to less than half the level recorded a year earlier. The informal gold trade is now thriving ahead of the peak demand period that starts mid-October and runs until early March.

Market Impact

Higher duties are driving bulk buyers to cash deals in the parallel market. Buying gold off the books with cash can save bulk buyers up to 6% compared to prevailing market prices. Traders in the cash market have been able to source gold at discounts of as much as ₹6,000 per 10 grams to domestic prices. For bulk purchases, off-the-record cash deals can bring prices down by as much as 6% from prevailing market rates. Hiren Chandaria said higher import duty creates a significantly greater incentive for gold to enter outside the official duty-paid channel. Prices in the informal market vary substantially and are individually negotiated.

Consumer Behavior

Shoppers are accepting off-the-book discounts to manage soaring gold prices. One shopper, Anuradha, a 55-year-old homemaker, bought ornaments for her daughter’s wedding at a discount of ₹5,000 for every 10 grams without taking a receipt. She trusted the jeweller and found the offer hard to refuse due to high gold prices. "It was an offer I couldn’t refuse. Gold prices are way too high and we trust the jeweler," Anuradha said. Gold prices have since eased but remain almost 28% higher than a year ago. Gold touched a record high earlier this year.

Context

India’s reliance on imported gold explains the current shift. Gold ranks as India’s largest imported commodity after oil. The country has little domestic gold production, so most demand is met through imports. India is the world’s second-biggest gold consumer after China. The informal gold trade has almost always existed in India. There was little incentive to bypass official channels when import duty stood at 6%. Hiren Chandaria noted, "A discount of that magnitude in the parallel market primarily reflects the economics of unofficial supply." The informal gold trade is expected to remain strong through the wedding and festival season ending early March.