India's Gold Formalization Push Must Avoid Fresh Imports
The Indian government's push to formalize household gold through electronic gold receipts (EGRs) has raised concerns about encouraging fresh imports of the precious metal. While formalizing existing gold holdings is a sound economic decision, policies that encourage households to buy more newly imported gold can add to the country's demand for foreign exchange and increase trade deficits.
The Reserve Bank of India reported that the current account deficit widened to $4.2 billion in the first quarter of 2026-27, from $3.4 billion a year earlier. The merchandise trade deficit rose sharply, with gold imports contributing to this trend. Gold differs from essential inputs like crude oil, which is used for transport and industry, as it is primarily a store of wealth or an investment asset.
The weakening rupee has made it more expensive for Indians to hold gold, but formalizing existing stocks through EGRs can make the market more transparent and increase liquidity. The World Gold Council's data show that domestic gold prices remained 59% above their level a year earlier in the second quarter of 2026, despite a 4% depreciation of the rupee against the dollar.
The government should focus on making existing gold more productive by supporting reliable systems for assaying, vaulting, recycling, and trading old gold. This approach would reduce transaction costs that push households towards informal channels and increase the use of EGRs as a regulated alternative to selling or pledging physical gold.