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Summary
India’s persistent demand for gold is not simply a cultural preference but also a reflection of weak social trust and institutional credibility. This helps explain why policy efforts to curb gold imports fail so often. We must get people to trust institutions.
India’s social capital deficit registers as a factor in its current account deficit through the demand for gold. Our appetite for gold is not an irrational cultural quirk. It is, in part, a revealed preference and a tangible symptom of our collective distrust in one another, society and civic institutions. More dramatically, economist Ajay Shah tells me that gold is a vote of no confidence in civilization itself.
Whatever people might say in opinion polls about how much they trust their government or their leaders, they reveal their true beliefs when they buy gold despite other assets being available.
Writing about the 19th century, historian Dietmar Rothermund noted that unlike Meiji-era Japan, surplus capital in India went into land and gold because of the absence of cross-cutting financial institutions that reallocate money.
These institutions didn’t come into being because the trust within caste-communities was accompanied by distrust among them, limiting the scale and scope of available investment opportunities.
Things have improved tremendously since then. Even so, Indians have good reason to be sceptical of solemn constitutional promises, pieces of paper or numbers on a smartphone in an era when both Parliament and the Supreme Court have given us retrospective legislation and taxation.
When my mother sold her house, the buyers and government officials told her that digitized property records were useless, all laminated documents were suspicious and one had to look at a 40-year-old handwritten sheet of paper edgewise to see if the right type of pencil was used.
Aadhaar is proof of neither age nor address. Courts can decide that the home that you bought from the municipal authority 20 years ago needs to be demolished because the authority didn’t follow the right procedure. Entrance examination question papers leak.
Distrust of civic institutions compounds the pre-existing generalized distrust in our hyper-diverse society, leaving India with a severe social capital deficit. We buy gold to cover this deficit.
Gold is imported and paid for in foreign currency, and hence shows up on the deficit side of the current account. As CapitalMind CEO Deepak Shenoy showed, if gold imports are excluded, India’s current account would have been in surplus for 11 of the past 12 quarters.
In other words, our social capital deficit is exacerbating macroeconomic problems during an approaching crisis.
Reacting to the Prime Minister’s call for reducing gold purchases, a post on X asked that if gold is a problem according to the government and the solution according to the people, who is smarter? This statement captures India’s gold dilemma. It is rational for Indians to purchase gold, especially during times of uncertainty. It is also rational for the government to discourage gold imports to manage India’s balance of payments. The two are in conflict.
How do we resolve this? From time to time, governments have discouraged, taxed or banned private gold imports. Such measures have worked in the short-term as people postpone discretionary purchases of jewellery. However, purchases for weddings and other functions cannot be put off beyond a point.
People buying gold as an investment are more sensitive to future prices. Eventually, gold purchases tend to pick up. So, price-based interventions to suppress Indian gold demand do not work beyond the short-term. We have decades of evidence to show that when the state tries to raise the effective price of gold for Indian households, people find other ways to access the metal.
Shenoy argues that we can manage the dilemma by bringing part of the domestic stock of gold into the market: either the central bank selling some of the gold in its vaults or by introducing a low-friction, tax-free scheme for people to sell their gold to the government, which can then resell it to domestic buyers. Recycling part of India’s locked-away gold, estimated at over 25,000 tonnes, can relieve some pressure on the current account and rupee.
Beyond gold policy, there are two fundamental ways to escape the dilemma. The first is to become an export-oriented economy.
The second is to strengthen social capital and increase generalized trust. There seems to be some evidence for this. While aggregate annual gold imports have remained steady within the 700-1,000 tonnes band, per capita gold demand peaked in 2010 at about 0.81g per person and has since trended down to around 0.45-0.56g in the 2020s. It was 0.45g in 2025. Per capita demand today is below where it was in 1995, despite per capita income being roughly seven to eight times higher in real terms.
Why might this have happened? Perhaps because a combination of technology (digital public infrastructure), financial instruments and stock market participation pushed the marginal gold buyer into other assets. Gold ETF holdings grew from 11 tonnes in 2010 to 115 tonnes by 2026.
Greater transparency, accountability and predictability in governance can strengthen this trend. Public policies must endeavour to build a little more trust in a few more things every day, because trust compounds.
The author is co-founder and director of The Takshashila Institution, an independent centre for research and education in public policy.
About the Author
Nitin Pai
Nitin Pai is co-founder and director of the Takshashila Institution, an independent centre for research and education in public policy.<br><br>He has been writing “The Intersection” column in Mint since February 2019, interpreting contemporary issues connected by geopolitics, technology, economics, science and philosophy.<br><br>His current research includes economic statecraft, technology geopolitics and strategic studies. He teaches international relations, public policy and ethical reasoning at Takshashila’s graduate programmes.<br><br>He is the author of "Nitopadesha: Moral Tales for Good Citizens" (Penguin Random House, 2023) and the co-editor of "India's Marathon: Reshaping the Post-Pandemic World Order", published in 2020.<br><br>Pai spent over a decade in the Singapore government in the areas of broadband development and technology foresight. He has also worked with SingTel's international connectivity business and undersea cable projects.<br><br>He was a gold medalist from the National University of Singapore’s Lee Kuan Yew School of Public Policy, an undergraduate scholar at Nanyang Technological University (NTU), and an alum of National College, Bangalore.
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