5 min readMay 15, 2026 12:54 PM IST First published on: May 15, 2026 at 12:54 PM ISTThe principles of economics say that to reduce demand for any product, there can be quantitative or price actions. If there are restrictions on how much can be bought, demand will come down. Alternatively, the price can be increased to the extent that people buy less. Now, quantitative restrictions are difficult to administer in a large country and invariably lead to the creation of a black market. Therefore, price changes are preferred. Following the Prime Minister’s advice to consume less gold and petroleum products, the government has opted for price changes for both.The duty on all precious metals has been increased from 6 per cent to 15 per cent. This makes gold and silver, which are big-ticket import items, more expensive. The idea is to make it more costly for consumers to buy. Now, there are basically three categories of consumers here.AdvertisementThe first is the affluent class, which is agnostic to price changes and will buy gold even if the price goes up.The second is the non-affluent class, which is more price sensitive. In fact, the absolute quantity of gold imports has come down over the years from 795 tons in 2023-24 to 721 tons in 2025-26. But the value went up from $ 45.6 billion to $ 72.4 billion. Quite clearly, the bull run in gold due to global uncertainty, especially after tariffs were imposed by the US, led to higher imports. But demand came down.On an annual basis, the price had increased by 30 per cent in FY25 and 52 per cent in FY26. Interestingly, the price of gold rose prodigiously on a monthly basis from $ 3,363/ounce in August 2025 to $ 5,019/ounce in February 2026, before coming down to an average of $4,723/ounce in April. Against this background, higher duties will further push back consumption for this class. However, when the demand is for traditional purposes like marriage, people tend to borrow money (unsecured personal loans) to buy gold, leading to unchanged demand but higher indebtedness. And ironically, the same gold can be used for further leverage under the category of gold loans!AdvertisementAlso Read | To win back foreign investors, India needs tax reformThe third category of demand is ETFs. Gold ETFs have become popular due to the bull run in prices. People invest in them, expecting the price of gold to rise, thus drawing the benefit without having to physically buy gold. However, the fund has to physically maintain 95 per cent of its value, which adds to demand. Now, these funds would not be sensitive to price, as this gets added to the value of gold and the NAVs.It does look like the bull run in gold is over, and that the upside to price may be limited. If this view is held, then there would tend to be less interest in gold ETFs. Even so, the increase in duty of 9 per cent would translate into higher inflation as this segment has a weight of 1.2 per cent in CPI.Similarly, the government has increased the price of petrol and diesel by about Rs 3 per litre. This comes on the back of an increase in the price of CNG by Rs 2, and that of LPG by Rs 60-Rs 993 depending on the category of consumers. Hotels and restaurants have had to cut back on their menus due to the cost of gas. Now, the higher prices for vehicle fuel may not have much impact on demand due to alternative modes of transport being available. But the OMCs will benefit, albeit partly, on this score, though there are still losses to be covered.you may likeThe impact on inflation will, however, be sharp. Petrol and diesel have a weight of around 4.9 per cent in CPI, which will react in the next inflation print and show an increase of 0.14-0.15 per cent. The second round would be on transport costs, and the tertiary impact will be determined by how other industries pass on this cost. The price of ATF was also increased earlier in April. Hence, the entire fuel basket will have a clear inflationary impact.The entire response to these two moves needs to be watched. The price impact is easier to conjecture. However, on the side of physical demand, it can still be a shoulder shrug, or, as Bertie Wooster would ask: Has the bally thing worked?The writer is Chief Economist, Bank of Baroda, and author of Corporate Quirks: The Darker Side of the Sun. Views are personal