Ministers want to increase domestic supply in country that imports 1,000 tonnes of gold a year, and hope to mine £2.5bn worth near city of Kolar

They are calling it the great Indian gold rush. Within months, Indian officials are expected to auction licences for new gold mines across the country, and abandoned colonial-era mines are set to be revived.

India is the world’s largest consumer of the precious metal, importing more than 1,000 tonnes a year. In August alone, 120 tonnes were brought in, and demand is expected to rise still further in the runup to Diwali and weddings season. Local production of gold totals less than two tonnes.

Successive governments have struggled to turn Indians away from gold, which economists say accounts for almost a third of the country’s deficit.

Now ministers want to increase domestic supply and believe gold worth more than £2.5bn can be mined in the dusty hills of Kolar, in the southern state of Karnataka, with more to come from other sites in the west and centre of the country.

Balvinder Kumar, of the mines ministry, told the Guardian: “There have been investigations and explorations by state governments and we believe there is gold there that can be exploited. These are some very deep and old mines. We will put about 80 [mines] to auction within two or three months.”

Kolar was first mined by British companies at the end of the 19th century, said Bridget White-Kumar, a local author and historian. In 1850 a retired Irish soldier who had fought in the army of the East India Company during its campaigns to seize the princedom of Mysore investigated reports of mines in the region. Over the decades that followed, the project and a thriving community grew. But most of the gold was sent back to London, White-Kumar said.

Kolar’s mine was nationalised in 1956 and finally shut down in 2001. White-Kumar said: “The glorious period was until the mid-1970s. There were a lot of unions that couldn’t agree with each other and costs were mounting. The gold was sold under the market rate. As a community, we haven’t come to turns with it even now. This news is what we have been waiting for.”

Demand for gold in India has continued to rise through years of economic growth. Kumar said: “Indians like gold for security, so in bad times they can sell it, and ladies also go for gold for ornamentation. Traditionally, gold is very attractive and day by day it is increasing.”

This month new measures were announced in an attempt to woo Indians away from the precious metal and use the some of the 17,000 tonnes of gold in jewellery and other heirlooms held by Indian families to fuel economic growth.

India urges its wealthy temples to bolster the economy with gold Read more

Huge quantities of gold – about 3,000 tonnes, more than two-thirds of the gold held in the US bullion depository at Fort Knox – is stored in temples, donated by pious Hindu worshippers. Narendra Modi, the Indian prime minister, has already tried to exploit the resource with a scheme that encouraged places of worship to deposit their gold with banks in return for interest payments.

The government planned to melt the gold and loan it to jewellers to meet the appetite for gold and reduce imports.

There have been other initiatives aimed at satisfying the huge desire for the precious metal. Two years ago, Indian government archaeologists dug for weeks at a site where a religious leader said he was certain 1,000 tonnes of gold was buried. They found nothing.

White-Kumar said the latest project to exploit the mines was “good news for the country and the community”. She said: “We are literally sitting on a gold mine.”