Lower imports by the world's No.2 buyer of gold after China could hurt a recovery in global prices of the precious metal after a sharp 28 percent drop last year.
"Indian demand for gold is lower as it is difficult for consumers to carry cash given election-related curbs. They are resisting unnecessary buying at the moment," said Bachhraj Bamalwa, director with All India Gems and Jewellery Trade Federation (GJF), which groups more than 300,000 jewellers.
Gold arrivals in both April and May could plunge to 20 tonnes, Bamalwa said, from March imports of 50 tonnes.
To guard against bribes or vote buying during the ongoing elections, the Election Commission has made it mandatory for individuals carrying more than 50,000 rupees ($830) to provide documentation, such as a proof of identity and an explanation for the source of funds.
For jewellers, the cap is 200,000 rupees in cash.
This has hit jewellery sales, which have already been squeezed by a 10 percent gold import duty imposed last year to reign in India's ballooning current account deficit.
Rural buyers, who account for about 70 percent of India's gold demand, pay in cash for jewellery as they have limited access to banking facilities like cheques and credit cards.
"The (Income Tax) department is very strict on the movement of cash and has opened a 24x7 call centre to receive complaints on violations, so people are scared to carry cash or gold," said Kumar Jain, vice-president with Mumbai Jewellers Association, which groups more than 10,000 jewellers.
In previous elections, political workers suspected of trying to bribe voters were caught with suitcases packed with cash and stowed in car trunks, ambulances and even hearses.
The ongoing elections in India started on April 7 and will continue till May 12. Results will be announced on May 16.
Jewellers are unwilling to transport huge stock and cash due to the curbs, GJF's Bamalwa said, adding that about 58 kilograms of legal gold was seized by income tax officials in the western state of Maharashtra earlier this month.
"Seizures of legal gold are happening everywhere ... government officials are harassing jewellers with legal gold in the name of elections," Bamalwa said.
SPIKE IN PREMIUMS SEEN
Tighter supply of gold as the wedding season peaks next month could further boost premiums <XAU-IN-PREM> from their current two-month high of $89 an ounce in India.
"There will be wedding season and Akshaya Tritiya demand in May, but supplies won't suffice. We may see high premiums till May, after that it may cool down," said a senior official with a private bank, which imports gold.
Gold is a popular gift at weddings in India. Akshaya Tritiya, which is on May 2 this year, is one of the days considered auspicious according to the Hindu calendar for gold purchases.
India's overseas purchases of gold may return to the 50-tonne mark only after June and hold steady thereafter until import curbs such as the so-called 80/20 rule - according to which a fifth of all shipments should be re-exported as finished product - are eased, industry sources said.
Prior to the curbs, India on average imported about 80 tonnes per month.
"The government may consider partial lifting of restrictions like relaxation of the 80/20 rule ... but they won't do anything in a hurry as it will be very harsh for the current account deficit," said Surendra Mehta, secretary general of India Bullion and Jewellers Association, which controls 70 percent of the imports by its members.