Gold Imports, Advance Authorisation Scheme and Impact on Indian Economy

The Government of India has imposed a 100 kg cap on gold imports under the Advance Authorisation (AA) Scheme to reduce pressure on India’s foreign exchange reserves and contain the rising trade deficit.

The move came following the Prime Minister’s appeal to reduce gold purchases for one year.

About Advance Authorisation (AA) Scheme

Definition

The Advance Authorisation Scheme is a trade facilitation mechanism that allows duty-free import of raw materials used for manufacturing export products.

Administered By

Directorate General of Foreign Trade

under the:
Ministry of Commerce and Industry

Objective of AA Scheme

• Promote exports

• Reduce production costs for exporters

• Improve competitiveness of Indian products in global markets

Applicability in Jewellery Sector

Jewellery exporters are allowed to:

• Import gold duty-free

• Manufacture export-oriented jewellery products

Recent Government Decision

Key Measure

• 100 kg cap imposed on gold imports under AA Scheme

Reason

• Rising gold imports

• Pressure on foreign exchange reserves

• Widening trade deficit

“Excessive non-productive imports can strain external sector stability.”

Impact of Rising Gold Demand on Indian Economy

1. Rising Trade Deficit

Current Situation

India’s merchandise trade deficit increased to:

• $333.2 billion in FY26

from:

• $284.5 billion in previous year

Gold Import Bill

India’s gold imports reached:

• $71.98 billion in FY26

• Increase of 24.08% year-on-year

Impact

Higher imports without matching exports worsen external imbalance.

2. Increase in Current Account Deficit (CAD)

IMF Projection

The International Monetary Fund projected India’s CAD could widen to:

• Around 2% of GDP in 2026

Meaning of CAD

A current account deficit occurs when:

• Imports of goods, services and transfers exceed exports and inflows

Consequences

• External vulnerability

• Greater dependence on foreign capital inflows

“Persistent current account deficits can weaken macroeconomic stability.”

3. Depreciation of Indian Rupee

Mechanism

Higher gold imports increase:

• Demand for foreign currency

Result

• Weakens Indian Rupee

• Makes imports more expensive

RBI Intervention

Reserve Bank of India may need to:

• Use forex reserves to stabilize currency markets

4. Dead Capital Formation

Problem

Large quantities of gold remain:

• Stored privately

• Outside formal financial system

Economic Impact

Gold locked in households:

• Does not generate productive investment

• Does not create jobs or infrastructure

Significance

Reduces:

• Financial savings mobilization

• Capital formation

“Idle gold holdings limit the productive use of national savings.”

Gold Consumption Status

India

Global Position

India is:

• World’s second-largest consumer of gold

• After China

Import Dependence

• Nearly 90% of gold demand met through imports

Impact

Domestic prices become highly sensitive to:

• International gold prices

• Global economic uncertainty

Gold Ore Distribution in India

Largest Gold Ore Resources

StateShareBihar43%Rajasthan24.92%Karnataka20%

Gold Production in India

Leading Producer

Karnataka

• Produces around 97% of India’s gold

Other Producers

• Andhra Pradesh

• Jharkhand

Global Gold Scenario

Major Holders of Gold Reserves

CountryPositionUnited States1stGermany2ndItaly3rd

Major Gold Exporters

CountryPositionSwitzerland1stUnited Arab Emirates2ndUnited Kingdom3rd

Why Gold Demand Remains High in India

1. Cultural Importance

• Weddings

• Festivals

• Religious traditions

2. Safe-Haven Asset

• Protection against inflation and uncertainty

3. Investment Preference

• Trusted long-term asset for households

4. Rural Savings Instrument

• Alternative to formal banking in some regions

Government Measures to Reduce Gold Import Dependence

1. Sovereign Gold Bonds (SGBs)

• Financial alternative to physical gold

2. Gold Monetisation Scheme (GMS)

• Mobilize idle household gold

3. Import Duty Measures

• Control excessive imports

4. Promotion of Digital and Financial Savings

• Encourage investment in productive assets

Challenges in Reducing Gold Dependence

1. Strong Cultural Demand

• Deep-rooted social preference for gold

2. Limited Financial Literacy

• Preference for physical assets

3. Informal Economy Linkages

• Gold used as store of wealth

4. Global Price Volatility

• International uncertainty increases gold demand

Way Forward

1. Strengthen Financial Inclusion

• Promote banking and investment access

2. Expand Gold Recycling

• Reduce import dependence

3. Encourage Financial Instruments

• ETFs

• Gold bonds

• Mutual funds

4. Increase Domestic Exploration

• Improve gold mining and extraction

5. Public Awareness Campaigns

• Promote productive investments over idle gold accumulation

“Sustainable economic growth requires channeling household savings into productive sectors.”

Conclusion

The rising demand for gold in India has significant implications for trade balance, current account stability, exchange rates, and productive capital formation. The government’s decision to cap gold imports under the Advance Authorisation Scheme reflects efforts to protect foreign exchange reserves and reduce macroeconomic vulnerabilities. Balancing cultural demand with economic stability will require stronger financial alternatives, domestic resource development, and sustained policy measures.