Prime Minister Narendra Modi has called on citizens for voluntary austerity measures and limit the use of petrol and diesel. The government has followed it up by hiking customs duty on gold and silver, which substantially adds to India’s import bill. The measures aim to control India’s imports and curb the current account deficit (CAD).

What is the CAD?

Simply put, a country has a CAD when its imports and transfers overshoot its exports, leading to higher spending of foreign exchange. It’s a key economic indicator of a country’s fiscal health. Most developing countries have a CAD as they seek more investment opportunities. But it is important that they are able to finance it. India too runs a CAD.  

The Economic Survey 2007-07 summed this up to say that CAD mirrors the saving-investment gap in the national income accounts and thus constitutes foreign savings. “The challenge before the emerging market economies is to leverage foreign savings to promote domestic growth without having the long-term consequences of external payment imbalances,” it had noted.

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Why is the CAD under pressure for India?

India was doing remarkably well on its CAD, which is estimated at 0.8% of the GDP in FY26. However, with the conflict in West Asia going on for over 74 days now and keeping oil prices above $100 per barrel, India’s oil import bill has been rising substantially. Imports of gold and silver have also added to the import bill because, though the volume of imports fell in FY26, the value surged significantly due to higher prices of the precious metals. The rupee has also been under pressure and has depreciated to over 95 against the US dollar.

Most analysts expect the CAD to be over 2% of the GDP in FY27, but say that it would be at a manageable level. However, they underline the need for the government to take measures to address the import bill and ensure that financial stability continues.

Is the hike in customs duty on gold and silver due to pressure on the CAD?

Yes, the move is expected to help cut down imports of precious metals and help bring the CAD under check. Import duty on gold and silver has been increased from 6% to 15%, and the import duty on platinum has been increased from 6.4% to 15.4%. Consequential changes have also been made to other items such as gold/silver dore, coins, and findings.

Government sources have underlined that India’s foreign exchange resources must be prioritised towards essential imports such as crude oil, fertilisers, industrial raw materials, defence requirements, critical technologies, and capital goods. “Precious metals, while culturally and financially significant, are predominantly consumption and investment-driven in nature. Such imports involve a substantial outflow of foreign exchange,” they have pointed out.

On May 10, Prime Minister Modi had also urged citizens to limit the use of petrol, diesel and fertilisers as well as cut down on discretionary gold purchases and foreign tours. A report by JM Financial had pointed out that oil accounts for about 20% of India’s total imports, gold for about 9% and fertilisers for a manageable 2%. Close to 58% of the total remittances ($30 billion FY25) under the Liberalised Remittance Scheme (LRS) have been for international travel, up from 35% in FY19. Remittances for investments in equity are another category that has more than doubled to 8.4% versus 3.1% in FY19.

Are more measures likely?

Yes, it is expected that the Centre may take more measures to help contain the CAD. A hike in retail prices of fuel is being widely expected, but there is no official word on it as of now. The report by JM Financial pointed out that even as crude oil prices spiked 80% to over $120 per barrel, petrol and diesel prices were unchanged; only prices of bulk diesel (+25% to INR 109.8/litre) and commercial LPG (+78% to INR 3,024/cylinder) were hiked.

“We expect the government to follow a gradual approach; hence, fuel price may be increased in tranches, LRS limits may be reduced temporarily,” it said. Kotak Institutional Equities also said the government may have to raise retail prices and/or absorb higher losses depending on the duration and magnitude of the conflict and high oil prices.

Following the PM’s call, several corporate offices have started working from home to help cut down the country’s fuel bill. The government, too, is set to undertake austerity measures and limit foreign travel, etc. Customs duties on other non-essential imports could also be hiked further. Kotak Institutional Equities also noted that certain taxation measures in the short term can reduce imports of certain items or increase capital flows, including higher GST and customs duty on gold and precious stones, as well as lower capital gains tax on equities for foreign investors.
 

Published on: May 13, 2026 12:24 PM IST