The average world gold price has fallen by 20 percent year-on-year in the third quarter, to US$1,326 per ounce from US$1,652 in October 2012. Prices have been declining in each quarter of 2013. But not in India.

Grappling with a high trade deficit and a weak rupee, India imposed a series of measures earlier this year to crimp demand for the metal – the second biggest item on its import bill after oil. It introduced a record 10 percent duty on gold imports and tied the volume of imports to exports, making it more difficult and expensive for gold to be sold to domestic markets. Imports shriveled from a record 162 tonnes in May to 24 tonnes in October.

Indians are estimated to hold close to 25,000 tonnes of gold personally. At the current price, that represents US$1.25 trillion in value terms. By the end of FY13, India will be a US$2-trillion economy, meaning that the gold stock represents over 50 percent of the economy. An official with the All India Gems & Jewelry Trade Federation points out that the $1.25-trillion value of physical gold as “dormant savings” which are not put to productive use towards investment and capital formation.

“If even 10 percent of these dormant gold savings are woken up, it would represent resources of Rs7 trillion (US$125 billion) - which is more than this year's gross borrowing by the government,” says the official.

The central bank also restricted banks to imports on a consignment basis only to meet the needs of exporters of gold jewelry, thus limiting the supply of the yellow metal through this channel for domestic use. This was done under the so-called 80/20 principle under which jewelry exporters get priority for supplies over domestic manufacturers. The principle states that 20 percent of all gold imported into India must be re-exported.

Gold imports virtually dried up after the federal government enforced the rule, creating confusion among government officials on its implementation and halting shipments for about two months.

The raw materials crunch, plummeting demand and the decision by major jewelers like PC Jewellers, TBZ, Tanishq and Gitanjali to curb gold sales and reduce head count, has imperiled the future of industry workers.

Ram Behari, 43, a third generation gold retailer in New Delhi’s crowded Kinari Bazaar, is a disenchanted man these days. His 18 sq meter shop in the walled city area with glassed-in wall displays, showcasing intricately-designed gold ornaments, has barely had any customers in the past three days.

This is ominous as the period from October to February traditionally marks the peak business period for the trade, encompassing as it does the biggest Hindu festival of Diwali coupled with the onset of the Big Fat Indian wedding season.

“Earlier at this time, my shop used to be bustling with buyers,” Behari said. “There were times when I didn’t get to go home before 2 am. But now, for smaller traders like me, it’s becoming a struggle to even stay afloat.”

"Our work has virtually stopped now. There is a huge premium of 7 percent on global prices. We can’t afford to buy gold at such high prices," added Veer Bose proprietor of Swarn Kamal, a wholesaler in Kolkata.

More than 500,000 gold artisans, craftsmen and salesmen have lost their jobs across the country since June, according to industry estimates. Worse, more than 50 percent of the gold industry workforce – an astonishing million-odd workers could further become jobless if the government’s decision to discourage gold import continues.

Adding to the complexity of the situation is the plummeting demand in the domestic market for gold jewelry due to the emergence of alternate investment options like gold exchange-traded funds, gold coins and bullion.

Due to stringent strictures on gold imports, and the suppressed domestic demand, India might even lose its crown as the world's biggest consumer of the precious metal to China, the World Gold Council said recently. The producer-funded industry body cut its forecast for demand from India in 2013 to around 900 tonnes from the 1,000 tonnes predicted previously.

Based on the World Gold Council’s third-quarter report, demand from India so far this year has totaled 714.7 tonnes, lower than mainland China's 779.6 tonnes. Demand from China has jumped nearly 40 percent this year.

"There are no supplies in the domestic market, and there is a little demand due to festivals... what little supplies that come, go to exporters," Bachhraj Bamalwa, director at the All India Gems and Jewelry Trade Federation told the media.

Few traders are convinced that the government’s approach to restrict gold imports will resolve matters. Rather, they point out, it is working adversely. While gold consumption has increased, shortage has been simultaneously created due to short supply, said regional chairman of Gems and Jewelry Federation Mitesh Khimji. “The hike in import duty will not only render more artisans jobless following the crisis in the industry but also promote smuggling of yellow metal,” he added.

More collateral damage has been a surge in gold smuggling. Illegal imports of gold have been on the rise in India in recent years. Last year, 102 tonnes of gold made its way into India through unofficial routes, said a Thomson Reuters report. The flow could spiral up to 140 tonnes this year, an increase of 40 percent, the report said.

The WGC has also warned that gold was finding its way into India through unofficial channels. "Gold entering the country unofficially through India's porous borders helped to meet pent-up local demand, together with an influx of recycled gold that was drawn out by higher prices and promotions offered by retailers," the World Gold Council said in its quarterly report.

Khimji points out that recent policy measures will further paralyze the industry and put artisans out of jobs and manufacturers out of business as there will be no gold available in the market.

Traders say it isn’t necessary to reduce consumption as all such past experiments have proved futile. On the contrary this leads to an augmented consumption by domestic buyers as purchases are brought forward and an artificial shortage is created due to slow supplies.

In a white paper submitted to the Finance Ministry earlier this year, the jewelers' federation suggested various means to help reduce the need of imports since consumption cannot be curtailed anyway as supplies will find their ways into the domestic market.

Plummeting demand from India could further pressure global prices,. which have plunged 24 percent this year on fears the US Federal Reserve would cut its economic stimulus.

(Neeta Lal is a New Delhi-based senior journalist; neetalal@hotmail.com)