Gold sales during Diwali have slumped to half their usual levels this year after the government hiked import duties to record levels, traders said on Friday.
India is known as the world's biggest consumer of gold and sales traditionally peak around Diwali, which is seen as a particularly auspicious time to buy.
But with only days to go before Monday's festival finale, traders at the famed Zaveri Bazaar jewellery market in the financial capital Mumbai said they had experienced a major fall in sales this year.
"This is one of the worst times for trade in recent years," said Rajesh Solanki, proprietor of Zaveri Kapoorchand Lalchand shop, adding that sales have dropped by about 50% on last year's festive season.
Imported gold's popularity made it the second biggest contributor after oil to India's current account deficit -- the broadest measure of trade -- which hit a record 4.8% of gross domestic product in the fiscal year to March 2013.
In a bid to curb imports and rein in the deficit, the government raised the customs duty on gold three times this year.
It now stands at a record 10 % after the last rise in August -- up from just 2% in January 2012.
The subsequent slump in supplies has prompted many customers to choose other jewellery such as diamonds and platinum, according to a recent survey by the Associated Chambers of Commerce and Industry of India.
Suresh Hundia, a former president of the Bombay Bullion Association, predicted that sales of gold and gold jewellery would decline by about 60% during this year's festivities.
"Due to price rise and high inflation, the general sentiment for bullion is low, which is getting reflected during the festive season," he said.
A report from Reena Rohit, an analyst at Mumbai's Angel Commodity Broking, said gold prices were trading at elevated levels of around 30,000 rupees ($485) per 10 grams, which had put a dampener on the demand.
The lack of fresh gold supplies in India after the central bank introduced import restrictions has added around a $100-120 premium per ounce, she said.
Although imports are slowly resuming, most gold is going only to exporters owing to the central bank's new rule that 20% of all imports must be re-exported, "thus creating a dearth ... in the peak festive demand season," Rohit said.