The Great Stimulus: Will GST rate cut spur a consumption boom?

Consumers, especially the middle class and salaried, have rarely had it so good. For long, they have complained of rising inflation and high taxes and equated monthly instalments (EMIs) eating into their disposable incomes and sought relief from the government. This was mirrored in sluggish growth in consumption demand, the biggest driver of India’s gross domestic product (GDP), over the last few years. Over the past six months, the government has made a concerted effort to turn things around. It began with the FY26 Union Budget, which announced income tax cuts for individuals, followed by 100 basis points of repo rate cuts by the Reserve Bank of India’s (RBI’s) Monetary Policy Committee, making loans cheaper. It cut rates by 25 basis points each on February 7 and April 9 this year, followed by a 50 basis point cut on June 6, taking the repo rate from 6.5% to 5.5%. The pass through of the reduction to customers has been strong, especially in fresh loans. Topping those decisions, Prime Minister Narendra Modi announced next-generation reforms in the goods and services tax (GST) from the ramparts of the Red Fort in his Independence Day speech on August 15. Three weeks later, the GST Council approved the rationalisation of the five-rate structure, pruning it to two primary rates of 5% and 18% with a higher 40% rate for ultra luxury and sin goods. From daily use household items like paneer, ghee, shampoo and toilet soaps to consumer durables like TVs, air conditioners and dishwashers as well as passenger cars, two-wheelers and insurance premia, the council has slashed rates across products. The changed rates, coming into force on September 22, at the peak of the festive season when demand typically spikes, are expected to add to the demand stimulus announced earlier. It’s a nudge, nay, an all-out push to buy and consume more! This push has been prompted by the challenging set of circumstances the Indian economy confronts, especially the uncertain global environment and the recent 50% punitive tariffs imposed by the US on Indian exports. While the Centre has for long preferred to focus on capital expenditure (capex), considering its multiplier effect in creating more jobs and demand, analysts say this time the government has left nothing to chance and focussed on consumption as well. They believe the tax changes could add as much as 0.6% to the GDP with various estimates suggesting it could boost private demand by Rs 1 lakh crore, or even Rs 2 lakh crore in a full year, as a host of items become more affordable. Sacchidananda Mukherjee, Professor at Delhi-based think tank National Institute of Public Finance and Policy (NIPFP), says there seem to be two drivers behind Prime Minister Modi’s GST move. “The first is the political economy, given that states such as Bihar are set to go for elections. The other is the economic requirement given that the external sector is not doing well,” he says, adding the economy needs greater demand to grow at a 6.5%-plus rate on a consistent basis. The cuts are a way to bring retail prices down and create demand, which will in turn lead to more investments and growth, making the rate rationalisation akin to a stimulus package, Mukherjee says. Private final consumption expenditure, which constitutes about 57% of the GDP, has remained patchy since the Covid-19 pandemic as high inflation, job losses and slow wage hikes impacted disposable incomes and private sector investments. The government is betting on higher demand finally revving up private sector capital investments, which have been in the slow lane largely as they await better capacity utilisation, despite the Modi government’s big corporate tax cut in 2019. According to the RBI, capacity utilisation in the manufacturing sector rose to 77.7% in the fourth quarter of last fiscal, marginally higher than 75.4% in the previous quarter. It has to be sustained at 75-80% for at least a few quarters to give companies the confidence to start investing in capacity. A note by HSBC Global Investment Research says the GST changes, combined with benign inflation, income tax cuts in February, and accommodative monetary policy, have created an environment for sustained growth. “A revival in demand should also provide a much-needed boost to private sector capex that has been sluggish for several years,” it says. The Fine Print Finance Minister Nirmala Sitharaman explained that she, along with ministry officials, had been working on GST reforms for several months now, even as state finance ministers expressed surprise at the suddenness of the announcement and raised concerns over potential revenue losses. The most immediate change will, of course, be the rate cuts under which there are now two main slabs of 5% and 18% along with a higher rate of 40%. The 12% and 28% slabs as well as the compensation cess, which was levied to compensate states for the loss of revenue after GST subsumed value-added taxes that states levied, will go away. The 0% rate and marginal tax rates for several items continue. The income tax cuts may not give too much boost to consumption and the repo rate cut will largely help producers and manufacturers. The GST cuts might boost consumption, but several items are price inelastic. -M. Govinda Rao,Chairman, Karnataka Regional Imbalances Redressal Committee It’s not all about the cuts, though, as rates have been increased for several items and services such as premium airline travel and non-alcoholic beverages. An SBI Research report notes that of the 453 goods on which the tax rate has been changed, 413 have seen a decrease. “Almost 295 goods are now under the new GST rate of 5% or nil from 12% earlier,” it says. The lower tax rates are also expected to further reduce inflationary pressures that have been on a downward trajectory for several months now. The structural reforms approved by the 56th GST Council are also expected to ease compliance and help firms that have for long been complaining about the complexities of the indirect tax levy. New Delhi-based chartered accountant Sachin Jain says litigation on notices under the GST have been a big challenge, leading to unnecessary harassment and costs for businesses. “In cases of fake registration, the department often blocks the credit and looks to recover the money from the recipient. How can the recipient know if the business is genuine or not?” he asks. Jain says there has to be a better system of checks at the time of registration. Similarly, the inverted duty structure and refunds are another source of hardship for businesses. For instance, several services continue to be taxed at 12% or 18% while the rate on the final product is now 5% or nil. This creates an inverted duty structure and can block profits until refunds are processed. “These measures will be a very good step for ease of doing business in India,” he says. To ensure ease of doing business, the council has taken several trade facilitation measures aimed at correcting the inverted duty structure, ensuring faster refunds, providing options for simplified registration and export liberalisation by scrapping the outdated intermediary rule, as a result of which the place of supply of intermediary services will be changed from the location of the supplier to the location of the recipient. This would help service providers and mitigate litigation around export status. All these steps are expected to help micro, small and medium enterprises (MSMEs) and exporters navigate the tax system better; the lower rates could also improve their global competitiveness. India’s key export sectors like textiles, handicrafts, leather, wood and paper and toys and sports are expected to benefit from these measures, at least to some extent. Commerce and Industry Minister Piyush Goyal has also expressed hope that the GST cuts will help offset the adverse impact of the US tariffs and create more demand. Rakesh Nangia, Managing Partner of professional services firm Nangia &amp; Co, notes that for businesses, the shift is transformative. The change untangles long-standing knots such as the inverted duty structure, which often locked up working capital, and frequent classification disputes most evident in automotive and FMCG (fast-moving consumer goods) sectors, he says. “Beyond compliance, the reform delivers something businesses value most, that is, predictability. With greater liquidity and fewer grey zones in tax treatment, companies can sharpen pricing strategies, strengthen supply chains and redirect capital toward expansion,” he adds. For the first time since its inception, the GST is beginning to shed its image of a complicated tax maze to emerge as a growth catalyst. “MSMEs, the backbone of our economy, now have the breathing space to innovate, while exporters have the clarity to expand globally,” says Nangia. Beyond compliance, the reform delivers something businesses value most, that is predictability. MSMEs, the backbone of our economy, now have the breathing space to innovate. -Rakesh Nangia,Managing Partner, Nangia &amp; Co Welcoming the GST cuts, India Inc is passing them on to consumers, but many firms are still working on strategies given the nuances involved. For instance, the GST on biscuits is down to 5% from 18%. But the packaging material comes under the inverted duty structure. In terms of pricing, manufacturers in the mass category, of Rs 10, are unlikely to reduce prices but increase grammage. This is so that they do not upset the price-sensitive consumer base and make it easy for traders. Consumers in this segment typically buy in small quantities, implying more work for traders if there are many transactions. Once it crosses Rs 30, biscuits become a part of a larger consumer spend. Here, companies are likely to reduce prices since consumers end up buying more products and, hence, spend more. Plus, most payments by this consumer base are made electronically. This could also be true for several other FMCG goods. However, in consumer durables and automobiles, companies are already announcing price cuts ahead of the auspicious Navaratri season, which sees significant sales. GST on small cars and motorcycles equal to or below 350cc has been cut to 18% from 28%, as well as on air conditioners, washing machines, dishwashers and all TVs. Manish Sharma, Chairman of consumer durables maker Panasonic Life Solutions India, notes that the rationalisation of GST on air-conditioners and televisions from 28% to 18% will directly benefit consumers, especially in the festive season. “With this reduction, products that were earlier seen as aspirational are now more accessible, allowing a larger section of households to upgrade to energy-efficient and connected appliances,” he says. Several automakers including Tata Motors, Renault India, Hyundai India, Mercedes Benz India and Mahindra &amp; Mahindra have already announced pass-through of the GST 2.0 cuts. (See graphic) Footwear major Bata India has introduced its Bata Price Promise initiative, extending the benefit of the cuts on footwear priced below Rs 1,000 to customers. Under the scheme, prices across Bata outlets reflect a 7% reduction. The company is absorbing the differential to pass on immediate savings to buyers. The Growth Boost The finance ministry has declined to quantify the impact of the cuts on GDP and remains cautious, with the FY26 GDP growth projection retained at 6.5%, given that the impact of the 50% tariffs by the US is yet to play out. The government hopes that a trade deal will be worked out with the US. This has now been reaffirmed by Prime Minister Modi and US President Donald Trump. The finance minister had highlighted that the measures aim to support not only end consumers but also critical sectors of the economy—agriculture and farmers, MSMEs, labour-intensive industries and medical devices and healthcare. Veteran economist and Chairman of the Karnataka Regional Imbalances Redressal Committee, M. Govinda Rao, says the rate rationalisation is an important reform, given the plethora of rates earlier. He believes the impact will become clearer in the coming months. “The income tax cuts may not give too much of a boost to consumption and the repo rate cut will largely help producers and manufacturers, although it could benefit consumers to some extent as well,” he says, adding that the GST cuts might boost consumption, but several items are price inelastic, meaning that a change in price does not impact demand. However, coming ahead of the festive season, the government and several analysts remain fairly optimistic about the expected consumption spurt, with some estimates saying it could boost growth by as much as 0.6% of GDP, while also helping ease inflation. It’s also seen as a salve after US President Donald Trump’s characterisation of India as “a dead economy”. Madhavi Arora, Chief Economist at Emkay Global Financial Services, says domestic demand may see a potentially boost of about Rs 2 lakh crore (0.6% of GDP) in calendar year 2027 with compensation cess getting dissolved. Rating agency ICRA expects FY26 GDP growth at 6.5% from its earlier projection of 6% but says that this could be dampened by the prevailing uncertainty related to US tariffs. Standard Chartered expects the GST cut to boost GDP growth by 10-16 basis points and lower inflation by 40-60 basis points on an annual basis. However, for now, it has retained its FY26 GDP forecast at 6.9% as well as inflation forecast on account of US tariffs, weather risks and mid-year GST implementation. Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, says income tax and GST rate cuts, if fully passed on to consumers, could provide a stimulus of 0.6% of GDP on a pro rata basis in FY26. It could also create a disinflationary impact of 100 basis points. Below the surface But scratch the surface and there are concerns over the implementation and the efficacy of the measures. Several states, most prominently eight Opposition-ruled states—Karnataka, Kerala, Tamil Nadu, Jharkhand, Himachal Pradesh, West Bengal, and Telangana—have raised concerns over revenue losses from the rate cuts and have sought further compensation. While the compensation cess is set to come to an end, revenue gains from the higher 40% tax on sin and ultra luxury goods are expected to help make up for some of the shortfall. In all, revenue losses are seen at about Rs 93,000 crore. Revenue Secretary Arvind Shrivastava has said that the net financial implication of the move would be about Rs 48,000 crore annually. As per some estimates, nearly two-thirds of this would have to be borne by the states, although the income tax giveaways and expected measures to support exporters are likely to impact the Centre’s coffers too. “We still see pressure on the FY26 combined fiscal deficit (of 0.15-0.20% of GDP) on a shortfall in direct taxes and a potential relief package for exporters. Our base case for the combined fiscal deficit is 6.9% of GDP in FY26 (with 4.4% for the Centre),” says a note by Standard Chartered. Though there is no exact estimate of the revenue implication for now, officials note that the 12% rate had fewer items. Further, the higher rate of 40% would bring in additional revenue. A cess is also expected to be levied on sin products like tobacco to ensure the tax incidence remains the same as now. Industry remains concerned over the transition and the impact on sales, since the festive season started from around Ganesh Chaturthi at the end of August and several consumers have postponed purchases till the cuts come into play. What happens to existing inventory and how it will be priced post the tax cuts is also a worry. Mom and pop stores say they have no option but to continue stocking inventory and not think much about the cuts. “We have to continue doing business, otherwise that will also result in a loss. The festive season is a few weeks away and we need to place orders,” notes Manish Agarwal, who runs a neighbourhood shop in Delhi. Auto firms are looking at a potential loss of Rs 2,500 crore as the compensation cess ends on high-end cars and the Federation of Automobile Dealers Associations has written to the Prime Minister for a solution. It’s not all rosy in the apparel sector, where GST on apparel above Rs 2,500 has been increased to 18% from 12%, and items priced below that are to be taxed at 5%. The Cloth Manufacturers Association of India has welcomed the increase of the 5% GST limit for garments from Rs 1,000 to Rs 2,500 but has noted that in the entire textile value chain, garments above `2,500 are the only products that are not in the 5% bucket. Retailers also point out that the younger generation chooses to buy clothes from foreign brands for an aspirational lifestyle and this will dampen sentiment. The Retailers’ Association of India has said placing garments and footwear above Rs 2,500 in the 18% GST slab could hurt affordability for the middle class and weaken the organised retail and garment sector. It has also recommended taxing all footwear and apparel at 5 % or placing a more reasonable price threshold. Re-stickering or retagging prices on merchandise also needs to be done across sectors. To ease at least some of the transition troubles, the government has now permitted manufacturers, packers, and importers to use existing packaging material by affixing revised prices to reflect the revised pricing. The Ministry of Consumer Affairs has extended this facility to manufacturers, packers and importers of pre-packaged goods for unsold stock or inventory with them till September 22, when the new GST rates will come into effect. The facility will be available up to December 31, 2025, or until the existing stock is exhausted, whichever is earlier. Worries also abound over inverted duty structures in several cases ranging from insurance to vegetable oil and packaging as a number of services are still taxed at 18% as against lower rates for end products. The other concern, also raised by several states, is whether the tax cuts will actually be passed on to end consumers. There is no provision for an anti-profiteering authority like in 2017 when GST first came into effect. The government is working on ensuring a smooth transition and is keeping a tab on current price trends. Sanjay Kumar Agarwal, Chairman of the Central Board of Indirect Taxes and Customs (CBIC), tells BT that if companies are not passing on the benefits to consumers, the government will take up the issue with industry bodies. While there will be some transition issues, he is optimistic that these will be worked out in the next few weeks. He, as well as other government officials are meeting industry bodies to help with implementing the changes. Cabinet Secretary T.V. Somanathan has also held an inter-ministerial meeting to ensure timely roll out of the new rates. Assuaging concerns, the revenue secretary says profiteering cases have been few and far between in GST with a total of 704 such cases worth Rs 4,360 crore. But Mukherjee of NIPFP says this needs to be monitored. “It is yet to be seen if companies choose to pass on the price cuts or instead increase the volume or quantity of the product being sold. Much of this will depend on markets and competition,” he points out. Govinda Rao also warns that due to the wide divergence between the 5% and the 18% rate, there could be instances of misclassification and litigation along with lobbying for moving more goods to the lower tax slab. Beyond the immediate GST cuts, several factors will affect consumer behaviour. Salary hikes this year are seen to have averaged in the mid-single digits in most sectors. The spectre of layoffs amidst the uncertain global economic outlook and the rise of AI continue to dim optimism. But a good monsoon and the upcoming Eighth Pay Commission award may boost demand. Exporters and MSMEs are also struggling to offset the dip in orders from the US by routing orders to other markets and await government support in the form of export incentives and liquidity enhancement measures. Rajiv Kumar, former Vice Chairman of the NITI Aayog and chairman of Pahlé India Foundation, remains optimistic of the impact of the GST cuts on consumption and says the reduction of the tax to zero on a large number of essentials will put more money in the pockets of the poor and lower middle class. However, like in the past, when corporate tax cuts of 2019 largely failed to nudge India Inc to invest, it has to be seen if people choose to save more or spend more. Besides, economists and policy experts are calling on the government to not stop at the GST rationalisation but also move on reforms in other areas like land and labour laws to provide a more sustainable boost. The robust 7.8% GDP growth in the first quarter of the fiscal has given hope that the domestic economy can withstand a lot of this uncertainty through the sheer power of its internal engines of consumption and capex. Indicating nervousness of investors over the tariff uncertainty, the rupee has hit fresh lows and has once again breached the 88 level against the US dollar. Stock markets too have not reacted much to the GST cuts. For now, the message from the government is clear—go out, shop and consume. Will consumers take the bait? @surabhi_prasad

The Great Stimulus: Will GST rate cut spur a consumption boom?

From income tax cuts to the new I-T act, and now reforms in the Goods and Services Tax, the Centre has implemented a series of reforms over the past six months to push consumption. Will domestic consumption offset the tariff headwinds?