Why India's love affair with gold is set to deepen

For the last two days Neeta Malhotra has been busy shuttling from one jewellery store to another in Mumbai. Her elder daughter is getting married next year but she's trying to buy as much jewellery as possible for the wedding now.

'I was waiting for this period to start buying gold jewellery for my daughter's wedding' says Mrs Malhotra, as she checks out a necklace in the store.

But why is she in such a hurry to buy so much jewellery right now? After all, her daughter's wedding is still a year away.

"This is the best time to purchase gold and the prices are also low right now. I am not sure whether I will get the same rate next year," she says.

Neeta is one among millions of Indians who have been thronging stores over the last two weeks to purchase jewellery, as the festive and wedding season kicks in.

Domestic prices are 7.4% lower compared to the same period last year, thanks largely to a slump in international demand - and this is expected to give a big boost to sales this year.

The festive season runs from October to December every year, making these months the most important for buying gold in India.

Diwali, the festival of lights, takes place on 23 October this year and most weddings will also take place during this period. Gold ornaments are often given as wedding presents, irrespective of the religion.

Analysts say that nearly 20% of annual sales are generated during this period and the World Gold Council predicts that India will import 850 to 950 tonnes of gold in 2014.

Rajesh Popley, director of the Popley Group, which has jewellery stores in Mumbai and Dubai, expects sales to go up.

We are expecting demand to rise by 20%-30% this Diwali compared to last year, he says.

Given the gold craze in India, it is no surprise that it is the second biggest import item after crude oil. The country's total gold and silver imports stood at $55.7bn (£34.7bn) in the 2012-13 financial year.

But this has had an adverse impact on the current account deficit (CAD) which is the gap between export revenues and imports payments.

In 2013, the government raised import tariffs to 10% to bring down the deficit. It also made it mandatory for trading agencies to then export 20% of the goods which had been imported.

These curbs had a major impact on supply, with the value of gold and silver imports dropping 40% to $33.4 billion in 2013 -14.

However, as a result, the deficit narrowed to $32.4bn from $87.8bn during the same period, according to the Reserve Bank of India.

"The CAD was a big concern for the economy but the scenario has now changed dramatically," says Siddhartha Sanyal, chief economist at Barclays India.

But these restrictions have also affected the business of gold jewellery retailers in a big way.

"It has been a struggle for the industry to source gold and it has been a tough period for retailers," says Mr Popley.

To counter this issue, he has been importing jewellery directly rather than making items in India. Many retailers have adopted this strategy - at the cost of lower profits.

India's central bank eased some rules in May this year - like allowing more agencies to import gold to sell. This has given some breathing space to the industry, with supply increasing in the market.

But these curbs have also given rise to gold smuggling in the country.

According to media reports, travellers have been trying various methods to get gold into the country via unofficial routes. Some passengers have tried to conceal bars and coins in their luggage, or in their clothes.

Many have also arrived wearing it and later claimed that was their own personal jewellery.

Some smugglers have even tried to hide the bullion in airplane lavatories to pick it up later. Many have been bringing gold into the country by sea.

According to the World Gold Council, by the end of this year, 200 tonnes of gold will have been smuggled into the country.

Marcus Grubb, from the World Gold Council feels that restrictions on imports have created two gold markets in India - an official one and a smuggled one.

"The curbs have distorted the market. There isn't sufficient supply to meet demand," he says.

This has also had a negative effect on jewellery retailers, who have been losing out to players that have been buying their gold from the smugglers.

Analysts expect gold purchases to pick up. In the second half of 2013, demand for the precious metal fell due to high gold prices and import restrictions. But that trend has started to change over the last three months.

In September, imports surged to $3.7bn compared to just $682.5m last year.

"Demand for physical gold in India never really dies. There maybe a dip for a while but it always bounces back.

"It's an emotional, sentimental and religious purchase," says Rajesh Popley.

After going through a lull, the Indian economy has also started to perform better, with foreign investment coming into the country.

This has also added to consumer confidence, which is why people are purchasing more than they were eight to 10 months ago.

Increased household wealth, rapid urbanisation and higher economic growth are going to drive gold demand in India in the next three to five years, says Marcus Grubb.

And going by the current trends that prediction does not come as a surprise. The Indian love affair with the precious metal is only expected to get deeper.