India’s relationship with gold is ancient, emotional and enormously expensive. Every year, we import 800–900 tonnes of the yellow metal, spending close to $50 billion in precious foreign exchange — making gold one of the largest contributors to the current account deficit (CAD) year after year. Successive governments have tried customs duty hikes, quantity restrictions and periodic schemes to curb imports. Yet, demand has proved stubbornly inelastic. Gold continues to flow in—through official channels when duties are moderate, and through unofficial ones when they are not.
What’s less well known is that when the gold exchange-traded fund (ETF) was first conceived, one of its objectives was not merely financial innovation but to reduce, or at least postpone, the import of physical gold. The idea was elegant: channel India’s deep and lasting appetite for gold into financial products rather than repeated shipments of imported bullion. That promise, however, has never been fully realised, because the supporting market structure and regulations evolved differently from that original vision. Three structural reforms could finally make good on it.
1: Gold ETFs only for financial gold
Gold ETFs in India have grown rapidly, bringing millions of investors into financial gold. But there is a structural contradiction at the heart of the product. Current norms require ETFs to predominantly hold physical gold, i.e. every incremental rupee entering the category ultimately translates into demand for bullion. This was never the original intent.
India does permit electronic gold receipts (EGRs), but EGRs by themselves don’t end the underlying demand for physical gold—they largely change the form of ownership rather than reduce import dependence. The objective must be broader. Gold ETFs should be allowed, or encouraged, to allocate meaningfully to financial gold instruments including sovereign gold bonds, gold deposit schemelinked instruments, EGRs and exchange-traded derivatives alongside physical holdings.
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This matters because some existing alternatives have not scaled as expected. Gold deposit schemes have seen limited adoption. Gold metal lending has not developed into a large recycling mechanism. One reason is behavioural: jewellers have often preferred carrying unhedged gold inventory in a secular uptrend in prices, while benefiting from structures that reduce the need to borrow metal. The ecosystem has, therefore, not created sufficient incentives to recycle domestic gold stock into productive circulation.
ETF flows can help fill that gap. Most investors seek price exposure to gold, not physical delivery. They buy units, not collect bars. As long as the underlying instruments accurately track the gold price—which sovereign gold bonds and futures contracts demonstrably do—the investor experience is identical to holding a bullion-backed ETF, along with the benefit of interest income. This reform is less about financial engineering and more about aligning capital flows with national balance sheet efficiency. India was the first nation to conceive a gold ETF: reducing physical imports was always part of that philosophy.
2: No capital gains tax after 2 years
The second reform addresses the supply side. India is estimated to hold about 25,000 tonnes of gold in household hands—jewellery, family reserves, investment holdings and inherited assets accumulated quietly over generations. This is one of the largest private gold stocks in the world. Yet, this enormous reserve contributes almost nothing to domestic supply.
At first glance, removing capital gains tax after two years appears an obvious solution. But taxation is not the only, or even the main, reason households don’t sell. A major structural reason is the growth of India’s loan-againstgold ecosystem. Today, households can access liquidity while retaining ownership of the asset. Instead of selling gold to meet consumption or business needs, they borrow against it and continue taking part in future price appreciation. For many families, this is economically and emotionally superior to disposal. Capital gains reform alone will therefore not unlock meaningful supply, but it still matters.
Currently, gains on gold held beyond two years attract long-term capital gains tax (LTCG) at 12.5% with no indexation benefit. Combined with transaction costs and behavioural inertia, many households simply prefer to hold indefinitely. Removing LTCG tax changes the relative appeal of selling against retaining. Combined with elevated domestic gold prices and stronger monetisation channels, it creates a compelling case for recycling dormant household gold. Even a modest rise in monetisation—1% or 2% of existing holdings over several years—could release hundreds of tonnes annually into domestic supply, directly displacing fresh imports tonne for tonne.
3: Sops to importers for borrowing
The third reform connects the two sides of the market. India already has mechanisms to mobilise domestic gold through deposit schemes. Yet, mobilisation is limited because there has not been enough natural demand for recycled domestic gold. At the same time, large corporate gold users and importers—especially organised jewellers and industrial users—continue to rely predominantly on fresh imports, because imported metal is operationally simpler and often economically equivalent.
Policy can bridge this gap directly. Large corporate importers should be given economic incentives to first borrow the metal mobilised through gold deposit schemes before importing incremental quantities. The incentives need not be subsidies, but be in the form of preferential regulatory treatment, lower financing costs, reduced procedural friction, import-linked credits, or calibrated duty mechanisms that make domestically mobilised gold commercially competitive.
This creates a circular domestic market: households deposit, financial institutions mobilise, corporates borrow, and imports are deferred. Even partial substitution at the margin could create a meaningful reduction in annual import intensity.
Together, the three reforms build a coherent and complementary framework. None of them bans gold, penalises consumers, or asks Indians to abandon their attachment to the metal. Instead, they work with incentives rather than against them—historically, the only durable way to shape behaviour in a market as emotional and embedded as gold. India cannot legislate away its love for gold. But smarter market design and better-aligned incentives can ensure that more of that demand is met from domestic financial and recycled channels rather than imported bullion — meaningfully easing one of India’s most persistent pressures on its external balances.
Rajan Mehta and Sanjay Gaitonde also contributed to this column
The Author is Co-Founder, Lakshya Amc
