Indian citizens are being urged to halt gold purchases for an entire year as the country grapples with the deepening economic fallout of the conflict involving the US, Israel, and Iran.
“In the national interest, we must decide that for one year, even if there are functions at home, we will not buy gold jewelry,” Prime Minister Narendra Modi declared on May 10. “Patriotism is not just about being ready to sacrifice one’s life at the border. In this situation, it means living responsibly and fulfilling our duties to the nation in our daily lives.”
The appeal was swiftly followed by a significant policy shift: three days later, India increased its gold import duty from 6% to 15%. This move serves as a bitter pill for a nation that represents the world’s second-largest market for gold jewelry and investment. In the fiscal year ending March 31, India imported precious metals valued at US$72 billion.
Gold holds immense cultural significance in India, where it is traditionally gifted during weddings and passed down through generations. However, Prime Minister Modi emphasized that these purchases drain the nation’s foreign exchange reserves at a time when the country is struggling with soaring oil import costs. With India importing over 85% of its fuel requirements, the economic pressure is mounting.
Oil prices have spiked by as much as 70% at their peak following the outbreak of hostilities and the effective closure of the Strait of Hormuz—a vital trade artery that facilitates about 20% of the world’s oil and liquefied natural gas supply.
The surge in energy prices has forced governments worldwide to implement austerity measures. While many nations are focusing on energy conservation, India appears to be unique in its request for citizens to curtail spending on precious metals. This is rooted in broader economic anxieties, as both gold and oil imports are largely settled in US dollars. The heightened demand for the greenback has pressured the Indian rupee, which has depreciated by approximately 5% against the dollar this year, fueling concerns over potential inflation.
“For the jewelry sector, this situation is worse than the Covid pandemic,” says New Delhi-based jeweler Sanjeev Agarwal. Fellow businessman Abhishek Agarwal echoed these concerns, noting that retailers are deeply worried about their survival if public demand for gold grinds to a halt.
Addressing Non-Essential Imports
According to Professor Sundaravalli Narayanamswami, head of the India Gold Policy Centre at the Indian Institute of Management Ahmedabad, over 90% of India’s gold demand is met through imports. “Every year, 600 to 700 tons of gold are imported, and with very low export figures, this gold simply accumulates in households,” she explained. While estimates vary, Indian women are often cited as holding approximately 11% of the world’s gold reserves.
Despite its cultural importance and status as a “safe haven” asset during times of uncertainty, gold accounts for roughly 9% of India’s total imports. Unlike oil, gold is not considered an essential commodity for industrial production, making it a primary target for government intervention. In the past, India has sought to curb excessive gold imports by raising tariffs and encouraging alternative investment options that do not involve physical bullion.
The Broader Call to Action
Beyond the moratorium on gold, Modi has encouraged the public to embrace public transportation, carpooling, and working from home. He also urged citizens to limit non-essential overseas travel to reduce fuel consumption. Furthermore, he requested that families be mindful of cooking oil usage and called on farmers to optimize their fertilizer application.
These measures mirror strategies seen in other countries struggling with fuel inflation. Sri Lanka has introduced fuel quotas, Thailand is encouraging residents to limit air conditioning use, Egypt has mandated earlier closing times for businesses, and Mozambique has promoted remote work.
However, Hamad Hussain of Capital Economics describes Modi’s call to avoid gold as “not exactly standard.” He noted, “In the case of India, it can be explained by the fact that the country imports massive amounts of gold, which forms a large chunk of their import bill. So, in some ways, this policy makes sense.”
The Long-Term Impact
Economists remain divided on whether a reduction in Indian demand will sway global gold prices. Hussain suggests that as the world’s most populous nation and a major consumer, a drop in demand could “put downward pressure on global gold prices by shifting the balance toward an oversupply.”
Conversely, Sebastien Tillett of Oxford Economics believes the impact will be “limited,” as prices are currently driven more by international investor sentiment and geopolitical uncertainty. He also expressed skepticism regarding the long-term effectiveness of the appeal, stating, “Public appeals may have an effect, but they are more likely to just delay or divert purchases rather than erase them entirely. Gold is deeply embedded in Indian culture and household savings.”
History provides a cautionary tale: the 2013 hike in import duties led to a rise in smuggling and illicit trade. While some analysts view Modi’s strategy as the most drastic response to the energy crisis thus far, opposition leader Rahul Gandhi has criticized the government for “shifting the responsibility onto the people.”
For the local industry, the challenge is existential. Jeweler Shweta Gupta expressed the sentiment of many in the trade, stating, “If it were for two months, we might survive, but one full year is too heavy. How are we supposed to pay our employees?”
- What happened during the 1970s oil crisis, and are we heading toward a worse situation?
- The US-Israel vs. Iran war threatens food, pharmaceutical, and mining sectors – Indonesia’s nickel production disrupted.
- Asian nations anticipate oil price volatility; President Prabowo discusses fuel derived from palm oil and sugar cane.
- To what extent does the US-Israel vs. Iran war affect Indonesia’s economic and political stability?
- From plastics to cosmetics – Price hikes hit Indonesian goods due to Middle East conflict.
- The Iran vs. Israel-US war: Are we heading toward a Third World War, or is the fear exaggerated?
- The high-security vaults in the US holding tons of gold bullion belonging to various nations.
- Is buying gold a wise move amid economic uncertainty?
- How the Iran war could drain Asia’s rice bowl.
Summary
The Indian government has urged its citizens to stop purchasing gold for one year to curb foreign exchange outflows amid an economic crisis fueled by global geopolitical conflicts. As a concrete measure, the government has also raised the import duty on gold from 6% to 15% to alleviate pressure on the rupee and address the surge in fuel import costs. This policy was implemented because gold accounts for approximately 9% of India’s total imports, making it a primary target for government intervention compared to other essential commodities.
These drastic measures have sparked serious concerns within the local jewelry sector, which faces potential collapse due to a significant decline in demand. While economists remain divided on the policy’s effectiveness in stabilizing global prices, many doubt its long-term impact, given that gold is deeply ingrained in Indian culture and serves as a vital savings instrument for the public. Beyond gold restrictions, the government is also encouraging citizens to adopt energy efficiency and reduce the consumption of non-essential goods to navigate global economic uncertainty.