As the effects of an energy shock from the West Asian crisis, now in its third month, reverberate globally, Prime Minister Narendra Modi on Sunday asked citizens to take measures to reduce the consumption of petroleum products and conserve foreign exchange reserves. He suggested reviving COVID-era measures, such as work-from-home arrangements, and avoiding non-essential foreign travel and gold purchases for a year.The Prime Minister’s caution about gold purchases comes amid heightened risk of weakening macro fundamentals if the crisis drags on. The domestic currency, under pressure since late last year due to weakening foreign investment in the country in the backdrop of steep US tariffs, slipped to a record low of $95.63 against the US dollar on Tuesday as crude prices remained above $100 a barrel due to a standstill in traffic via the Strait of Hormuz. Oil prices have surged nearly 50% since before the Iran war.However, this is not the first instance when the citizens have been asked to voluntarily stop gold purchases. In 2013, the then Finance Minister P Chidambaram had made similar appeals, even raising the customs duty on gold imports from 6% to 10% between May and August 2013 in the middle of this rupee turmoil after the ‘taper tantrum’ in the backdrop of the 2008 global financial crisis. The duty on gold is currently at 6%.Economists point out that India’s heavy reliance on imported gold, close to 750 tonnes every year with negligible export offsets, has repeatedly emerged as a macroeconomic concern, especially during external shocks. Since gold accounts for a substantial share of the country’s import bill, any sharp rise in purchases tends to widen the Current Account Deficit (CAD), put pressure on foreign exchange reserves and complicate the management of the rupee and inflation, especially during periods of external uncertainty. Offering concessions to the UAE as part of a trade deal seems to have catalysed a spurt in imports of gold from that country, according to experts.Structural challenges in the gold supply chainIndia’s gold import in FY26 had jumped by nearly 25% to $71.97 billion, compared to $58 billion in the previous financial year. This was largely due to the value of gold prices, with gold imports in FY26 falling to 721.04 tonnes compared to 757.09 tonnes in the previous financial year, data released by the Commerce and Industry Ministry showed. Gold prices have surged over 40% in the last year, inflating the import bill.Despite these challenges, experts have pointed out that India’s approach to gold management has remained largely unchanged for decades, focusing primarily on demand-side interventions with limited success. Import duty adjustments have inadvertently fueled smuggling and prompted trade diversions through countries with preferential tariff structures, particularly the Least Developed Countries (LDCs)A working paper by IIM Ahmedabad titled ‘Strategic Acquisition and Value Addition of Gold Resources for India’ said that with an annual demand of approximately 750 tonnes, India stands as one of the world’s largest gold consumers. However, India’s domestic production capabilities, a mere 1.5 tonnes annually, create one of the country’s most persistent macroeconomic challenges.Story continues below this adAlso Read | Why PM Modi has asked Indians to reduce spending on gold, petrol, edible oils“Despite these challenges, India’s approach to gold management has remained largely unchanged for decades, focusing primarily on demand-side interventions with limited success. Import duty adjustments have inadvertently fueled smuggling and prompted trade diversions through countries with preferential tariff structures, particularly Least Developed Countries,” the report authored by Sundaravalli Narayanaswami and Anmaya Agarwal said.Challenges from the UAE dealThe IIM paper pointed out that the fundamental supply-demand imbalance necessitates massive imports, chiefly as finished bullion (approximately 500 tonnes) and doré (essentially the semi-pure alloy of gold and silver created at mine sites; approximately 250 tonnes), though these proportions remain somewhat fluid. The import structure is heavily skewed toward finished products, significantly limiting domestic value addition opportunities.“Policy initiatives have sometimes exacerbated this challenge, as evidenced by the UAE trade deal agreement that inadvertently incentivised bullion imports over doré by creating a more favourable tariff structure for the former… the deal with the UAE has created unintended consequences by inverting the intended duty differential between bullion and doré.,” the report said.Giving concessions to the UAE for importing gold from the country under the deal has inflated the import bill, as India does not source gold from countries that offer prices cheaper than market value and lacks refining capacity. Certain countries, such as Argentina, Peru, and the Dominican Republic, supply gold at below-average import costs. But these countries collectively represent only 15% of India’s total gold imports.Story continues below this ad“Alternative gold sources show promising development, with imports of gold ores and concentrates increasing (primarily from Colombia, with emerging volumes from Taiwan and Peru) and gold colloidal and compounds growing substantially (with Japan emerging as the dominant supplier),” the paper said.Also in Explained | Behind PM Modi’s austerity call, dipping foreign exchange reserves, rising gold importsSeveral countries, such as Switzerland, that do not produce gold have become gold trading hubs on the back of refining infrastructure. Using world-class London Bullion Market Association (LBMA) refineries, they have transformed low-cost gold doré into high-purity bullion for global distribution. This refining process generates approximately 40% value addition, neutralising trade deficit concerns through substantial high-value exports, the report pointed out.Japan, for instance, has 11 LBMA refineries which recycle roughly 500 tonnes of gold scrap annually to sustain massive export capacities. They exploit “urban mining” by recovering metals from electronic waste, which contains far higher gold concentrations than primary ore, the IIM paper pointed out. India has only one LBMA refinery.Weak refining ecosystem hurting IndiaWhile global gold trading hubs have used refining capacity to close vulnerabilities around gold imports, India’s gold refineries remain underutilised and lack the required policy support. A Niti Aayog report released last month found that, unlike established global hubs such as Switzerland and the UAE, which benefit from favourable policy regimes, large-scale operations, and deep integration with international markets, India’s gold-refining ecosystem continues to face multiple bottlenecks.Story continues below this adNewsletterFollow our daily newsletter so you never miss anything important. On Wednesday, we answer readers' questions.Subscribe“Historically, the duty structure has not sufficiently incentivised refining, with only a narrow differential between doré and refined gold. While a modest advantage existed between 2013 and 2016, subsequent duty rationalisation under GST and post-2021 adjustments shrank margins for refiners, leading to closures. At the same time, capacity remains fragmented, while the number of refineries increased from fewer than five in 2013 to about 33 in ߥ most remain small operations under 50 tonnes annually, limiting economies of scale,” the Trade Watch Quarterly report said.Global integration is also constrained by limited international accreditation, with only one LBMA-accredited refinery, restricting access to global financial markets and reducing India’s ability to position itself within international supply chains, the report said.“These challenges are compounded by financial and operational constraints, including high working capital requirements, limited access to capital, regulatory complexities, and informal operations. Countries like Switzerland and Hong Kong are top gold exporters, with estimates stating that Switzerland alone refines 70% of the world’s gold, and this position is the result of the top refineries and their role in finance. Similarly, Hong Kong is the primary conduit for gold flows in and out of China, along with being a centre for financial trading in Western markets,” the Niti report said.