The government of India is desperate to stem a runaway current accounts deficit that is weakening the economy. Together, gold and oil account for half of all imports. Since the government can't decrease petroleum imports substantially, it has targeted gold. Import tariffs on gold have been raised from 1% to 10% in two years. With a new "80/20" rule, the government holds 80% of all gold imports, releasing them only after the remaining 20% has been made into jewelry and re-exported.
In a nation that is the world's largest consumer of gold, and is also battling high inflation, the result is obvious: an explosion of gold smuggling far beyond the government's ability to cope.
In fact, gold has displaced illegal narcotics as the #1 item smuggled into India. With spot prices up to $120 an ounce over the international spot price, it's more profitable to smuggle gold than heroin!
From April 2012 to September 2012, there were 339 gold seizures, totaling 99 kg. From April 2013 to September 2013, there were 383 gold seizures, totaling 500 kg.
It is thought that only 5% to 10% of gold smugglers are caught. This means that an estimated 1000 kg of gold will be successfully smuggled into India this fiscal year. The average haul is increasing, as well. Whereas the typical gold smuggler a couple of years ago might be hiding a couple hundred grams of necklaces and earrings, today's smuggler is hauling kilo gold bars. Recently, many have been caught with multiple 1 kilogram bars on their person or in their luggage.
As India enters the fall festival season, jewelers are laying off staff by the hundreds, and pushing platinum and diamond jewelry in an attempt to remain in business. Smaller jewelers are buying raw gold on the black market, as there is almost no gold at all available at any price through traditional channels.
Indians will have their gold, one way or another. It seems that, while the recent government actions have reduced official imports from 142 tonnes in April to 11.2 tonnes in September, it has driven a large portion of gold demand underground, where there there are no taxes at all collected and the money is still flowing out of the country.