India is witnessing a sharp resurgence in gold smuggling after the government raised import duties earlier this year, creating lucrative opportunities for illegal traders while weighing on the country’s formal bullion market, according to the World Gold Council (WGC).

The warning exposes the unintended consequences of New Delhi’s decision to increase import tariffs in an effort to curb gold demand, narrow the country’s trade deficit and reduce pressure on the rupee. While the higher duties have dampened official imports, they have also widened the price gap between legally imported and smuggled gold, making illicit trade increasingly profitable.

India, the world’s second-largest gold consumer after China, more than doubled the import duty on gold to 15% on May 13, lifting the total tax burden to around 18% after including the 3% Goods and Services Tax (GST).

“The arbitrage is so huge. I mean, with the 15% duty and 3% GST, there’s an 18% difference, and that almost spurs an entire industry,” said Sachin Jain, chief executive of the WGC’s Indian operations.

According to Jain, the expanding grey market is eroding the competitiveness of organized jewelers, bullion dealers and authorized importers that comply with tax regulations.

“Grey market inflows and the disruption they cause are hurting organized players,” he said.

Official data suggest smuggling activity has accelerated since the tariff increase. According to figures presented to Parliament earlier this month, Indian enforcement agencies seized 160.91 kilograms of smuggled gold between May 13 and June 30, nearly double the 86.16 kilograms confiscated between April 1 and May 12.

Although seizures represent only a fraction of total illicit inflows, the sharp increase indicates authorities are intercepting more illegal shipments as smuggling networks respond to the higher tax regime.

The reversal marks a significant shift from the past two years.

The WGC estimates that gold smuggling fell to 69.2 metric tons in 2024 from 156.1 metric tons in 2023 and declined further to 20.4 metric tons in 2025 after India reduced import duties, narrowing the incentive to evade taxes. However, following this year’s tariff increase, industry officials told Reuters last month that illegal imports could exceed 100 metric tons in 2026, potentially reversing much of the progress made in reducing smuggling.

The resurgence brings to the fore a longstanding challenge for policymakers.

India is one of the world’s largest gold importers, and because the country produces very little domestically, it relies heavily on overseas supplies to meet consumer demand. Gold imports have a significant impact on India’s trade balance and foreign exchange reserves, prompting successive governments to use import duties as a tool to moderate demand during periods of external pressure.

However, economists and industry participants have long argued that excessively high tariffs often prove counterproductive by encouraging smuggling rather than reducing overall consumption.

The WGC’s latest quarterly report suggests higher duties are already reshaping the market. India’s net gold imports fell 23% year on year to 98.1 metric tons during the June quarter, the lowest quarterly level since September 2020, when nationwide COVID-19 lockdowns severely disrupted consumer demand and supply chains.

Domestic gold consumption also weakened.

Total demand declined 6% from a year earlier to 131.4 metric tons, as elevated prices and higher import costs reduced jewelry purchases. The weakness in jewelry demand was partially offset by robust investment buying, with investors continuing to accumulate gold as a hedge against inflation, geopolitical uncertainty and financial market volatility.

The contrast between jewelry and investment demand indicates that while consumers have become more price-sensitive amid record-high bullion prices, investors have continued to increase allocations to gold, viewing the precious metal as a safe-haven asset during periods of economic uncertainty, elevated government debt, geopolitical tensions and expectations of lower real interest rates.

Jain expects market conditions to improve during the second half of the year if gold prices stabilize. He said many consumers postponed jewelry purchases during this year’s rally and could return to the market as prices become less volatile, particularly ahead of India’s festival and wedding season, which typically generates the strongest annual demand for gold.

For policymakers, however, the renewed rise in smuggling presents a difficult trade-off. While higher import duties can temporarily reduce official imports and help contain the current account deficit, they also increase incentives for illegal trade, reduce tax revenues and place compliant businesses at a competitive disadvantage.

The latest WGC findings suggest that unless the gap between domestic and international gold prices narrows, the informal market could continue expanding, complicating India’s efforts to balance fiscal objectives, external stability and the health of its formal bullion industry.