Higher prices of gold, weaker rural incomes and stringent government regulations have lead to a sharp drop in gold jewellery demand in India during this calendar year.

Data released by World Gold Council (WGC) on Thursday showed that the total jewellery demand in India during the first six months of 2016 was the lowest since 2009 at just 186.3 tonnes.

During the April–June period, India consumed 97.9 tonnes of gold, down 20 per cent compared to the same period last year.

The national strike by jewellers, which had effectively closed the market for six weeks, came to an end in mid-April.

But there was no relief rally. Consumers were unprepared for the huge jump in the gold prices when the market re-opened. “Consumers were not only put off by the high cost, but also by the belief that such a price level would prove only temporary. Aside from essential purchasing and gifting around Akshaya Tritiya, demand was largely put on hold awaiting lower prices as a buying opportunity,” WGC said.

According to WGC, lower spending by rural Indians was another blow to demand.

The rural population accounts for more than half of India’s jewellery demand, so any difficulty in this sector has a material impact on demand.

Two consecutive years of deficient monsoon have taken their toll on rural incomes. Additionally, the introduction of an additional 1 per cent excise duty (which, prompted the jewellers’ strike in Q1) and the requirement that purchases above Rs 200,000 need a Permanent Account Number (PAN) card have acted as headwinds to the industry, most notably impacting demand in the organised sector.

An unintended side effect has been an increase in the flow of unofficial gold into India. Despite demand remaining weak, an estimated 44 tonnes of smuggled gold entered the market during the quarter.

The smuggled gold entering India is estimated to reach 140-160 tonnes in 2016, up from around 120 tonnes in 2015 as a certain section of market participants attempts to find a way around the legislation.

While the investment demand for gold bars and coins saw an upward momentum in global markets during Q2, 2016 amidst high level of uncertainty after Britain voted to exit the EU, volatility and higher prices deterred investment related purchases in India.