New Delhi, Feb 6 (IANS): The Union Budget 2020-21 proposal to reduce customs duty on gold and silver will curtail the increasing trend of smuggling of these precious metals in the country, India Ratings and Research has said.

Accordingly, the Budget has proposed to reduce the customs duty on gold and silver to 7.5 per cent from 12.5 per cent.

"The move will also improve the government's overall revenue from the sector," Ind-Ra said in a report.

"The duty reduction will support sectoral demand in the long term, as jewellery costs will come down and customers' purchasing power will improve."

According to the report, the erstwhile duty structure gave incentives for gold smuggling into India.

In July 2019, as part of the revenue-raising budget, the customs duty on import of gold was increased to 12.5 per cent from 10 per cent.

As per Ind-Ra's estimates, unofficial imports of gold range between 150-180 tonnes compared to the official gold import numbers of 600-700 tonnes for FY20.

"Ind-Ra believes that reduction in import duty thus is favourable for the domestic organised jewellery players."

"The move will also improve the government's overall revenue from the sector. The duty reduction will support sectoral demand in the long term, as jewellery costs will come down and customers' purchasing power will improve."

Besides, the report said the majority of the gold jewellery demand in India is price sensitive.

"Overall demand stalls for any sharp rise in gold prices. Consequently, amid a sharp rise in gold prices, revenue for the top organised players declined by average 32 per cent YoY in 1HFY21."

"In line with Ind-Ra's expectations of festivals to support recovery in 2HFY21, there was a strong demand recovery in 3QFY21 due to the festive season, pent-up demand, over 10 per cent decline in gold prices from its peak in August 2020 and improved customer sentiments as multiple Covid-19 vaccines received approvals from the US Food and Drug Administration."

Furthermore, the report cited that weddings contribute 60 per cent to the overall retail jewellery demand in India.

"The wedding season extends from November to February and April-May. Ind-Ra believes that the reduction in customs duty will improve business volume as it makes gold jewellery more affordable and further unlock pent-up demand from price sensitive buyers for the remaining wedding season."