There are only three players on the board: the modi government, 1. 4 billion people in india, and smuggling networks driven by high tariffs。
Modi is holding a large tariff knife and administrative control power, with people holding the unshakeable gold demand for marriage, savings, religious festivals, and smugglers relying on only one card – 15 per cent of import duties plus 3 per cent of taxes on goods and services – torn between domestic gold prices in india and international offshore prices。
On 13 may 2026, the government of india pulled gold import duties from 6 per cent to 15 per cent, the largest single increase ever recorded. Three months later, the world gold association predicted that india's illegal gold imports would again exceed 100 tons this year, a figure that had already been set at 20. 4 tons in 2025, when only 6 per cent of tariffs had been applied。
Modi's hand is pushing regular imports into the corner while feeding profits to the grey market。
It's our own people who cut down the knife
The moody's combination was removed and the intentions of each step were clearly stated, but the chain reaction of each step exceeded what was expected in new delhi。
On 10 may, modi spoke for the first time at a public gathering calling on the population to reduce gasoline consumption, control gold purchases and avoid unnecessary overseas travel. Three days later, the ministry of finance made a direct move, with gold import duties rising from 6 per cent to 15 per cent, and a parallel import threshold — a single import exceeding 100 kilograms — had to be officially authorized, and licensing had to be linked to the value of an enterprise's exports。
Morty spoke at a public meeting
The immediate trigger for this move is the escalation of the situation in the middle east, which has pushed up international oil prices, adding to a historical high of $71. 98 billion in gold imports from india for the 2025-2026 fiscal year. The rupee fell to 96. 18 on 18 may, refreshing the historical lows and making foreign exchange reserves urgent。
However, the high tariff knife was cut down first by regular importers. World gold association data show that official net imports of gold from india declined by 23 per cent in the second quarter of 2026, to 98. 1 tons per year, the lowest quarterly level since september 2020。
Formal refiners are worse — james josÉ, managing director of the cgr metal alloy company, put it bluntly, that the industry has a conventional profit margin of only 0. 65 per cent, while the tariff-induced market discounts are much higher, and the will of the refiners to import gold is almost zero。
The head of the precious metal department of a private importing bank in mumbai anonymously revealed that gold in the grey market was discounted at over $200 per ounce, a discount of over 4 per cent, while the maximum discount for formal banks was less than $10. Smugglers circumvent more than 18 per cent of the combined tax rate throughout, selling it cheaper than anyone, and the formal channels simply cannot。
The smuggling network is taking advantage of it. The arbitrage is its ammunition
Before the tariff adjustment, india had just experienced a beautiful round of smuggling. Following the reduction of customs duties from 15 per cent to 6 per cent in july 2024, smuggling dropped from 156. 1 tons in 2023 to 69. 2 tons in 2024 and contracted to 20. 4 tons in 2025. This trend is proof of one thing: as long as the price differential is reduced to no profit, smuggling itself will recede。
However, the 13 may hand card brought back the difference. The 15 per cent tariff overlap and the 3 per cent commodity service tax, with a combined tax rate of over 18 per cent, has left a stable arbitrage space for smugglers. The amount of gold seized by indian law enforcement from 13 may to 30 june was nearly twice that of 1 april to 12 may, and jumped from 86. 16 kg to 160. 91 kg。
The assessment of sachin jain, chief executive officer of the indian operations of the world gold association is straightforward: “the arbitrage space is huge, with an 18 per cent gap between 15 per cent of tariffs and 3 per cent of tariffs on goods and services, which has almost created a whole industry.”
Smugglers do not pay customs duties, taxes on goods and services and import a kilo of gold bars with a profit of more than rs. 2. 5 million. Even external sales at a market value of 4 per cent were profitable. At current gold prices, 100 tons of smuggled gold are estimated to have an equivalent value of $14. 35 billion, implying a direct loss of about $2. 65 billion in tariff and merchandise services revenue for the indian fiscal sector。
International real-time gold trading on 1 september
And the demand side was not held down at all. Real consumption of gold in india declined by only 6 per cent in the second quarter of 2026, to 131. 4 tons in the same year. The decline in demand for jewellery was the main reason for the decline, but there was no simultaneous contraction in marriage celebrations and savings. Formal imports fell by 23 per cent and real consumption by only 6 per cent, and the 17 percentage point gap is the share of the smugglers who eat。
Morty's rebroadcasting, which means he's passive
On 1 september, modi, for the second time in his year, publicly called on the population to “unnecessaryly buy gold” while upgrading the rhetoric — to tie down the consumption of gold to the promotion of national goods and self-reliance — as a necessary path to india's “developed india” when it became independent。
The move itself sends a signal that the combination of punches in may did not work as intended. The indian media have already reported that discussions are under way within the government on whether to reallocate gold import duties from 15 per cent to 6 per cent。
On board, modi now faces a three-line pressure: formal imports are shrunk by high tariffs, but demand has yet to disappear and demand has shifted to smuggling channels; rampant smuggling, in turn, lowers the prices of formal channels, leaving legitimate importers and refiners further uncompetitive; and foreign exchange outflows are only partly shifting from formal channels to grey channels, and the policy’s original goal of “reduced foreign exchange outflows” has not been fully achieved。
Even more problematic is the fact that modi's voice is hardly really moving consumption habits. India is the second largest global gold consumer, producing just over one ton per year and importing up to 700-800 tons per year. Gold is not just an investment in india, but a central vehicle for marriage, religion and wealth. After modi's first call in may, the jewellery stock suffered a single-day setback, but the shock was more marked by short-term fluctuations in market sentiment。
Again in september, kalyan jewellers fell by 4. 5 per cent, titan fell by only 1 per cent, and the market is already judging the effectiveness of such appeals by foot vote。
An overview of the position of the indian company titan on 1 september
Now, morty has a few cards to play. In april 2026, india had delayed imports of gold directly to a low point of about 15 tons in nearly 30 years, through ad hoc customs tax requirements and import authorizations, without a record of a simultaneous surge in smuggling. This suggests that short-term administrative controls can rapidly reduce imports before price differentials create sufficient arbitrage incentives。
The problem, however, is that in april that type of instrument was temporary, with banks completely suspending customs clearance for withholding tax surges and about eight tons of gold in customs vaults, a state that cannot be sustained in the long term。
The real problem lies in tariffs themselves. China’s foreign exchange and investment institute’s research director li gang judged that gold tariffs are essentially a short-term capital management tool for emerging markets to cope with strong dollar cycles。
But the current 15 per cent tariff in india is the opposite — full product coverage, non-differentiated collection, and long-term maintenance. And that's the engine of the loop. As long as tariffs are not reduced, arbitrage space is in place and ammunition from smuggling networks continues. Modi's call in september was tantamount to acknowledging that the may chess missed, but he was still hesitant to take it back。
