Will the GST rejig revive consumption and boost growth?

Unlike in the past, the latest rejig in the Goods and Services Tax (GST) is sweeping and across the board – rate cuts affecting about 400 items. It has filled the air with optimism about an immediate boost to household consumptions and fresh impetus to growth. The SBI Research estimates show that the GST rate cuts will bring down the weighted average GST to 9.5 per cent – down from 14.4 per cent when it was launched in 2017 and 11.6 per cent in 2019 (the latter two are the GST Council’s estimates).

The rate cuts are so expansive that it affects virtually all sectors – from household consumptions to health and education, large manufacturing and MSMEs, agriculture, travel and tourism, renewable energy and a host of other sectors. The rejig also simplifies procedures for registration and expedites the GST refunds.

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While all these will boost consumption immediately – offsetting to a large extent the damages caused by the US tariff to exports – it would be premature to second-guess the exact magnitude. For one, Finance Minister Nirmala Sitharaman herself was cautious, when asked about it on September 3, saying that it would take a couple of months to know the impact on consumption. For another, Pronab Sen, former chairman of the Standing Committee on Statistics, told The Federal that after an initial boost, consumption would go back to the current level, growing at 6.5-7 per cent, and there “may not be any great impact on growth”.

However, the mood is upbeat in households and other sectors.

GST cut brings buoyancy to many markets

The FMCG market, which includes food and beverages, personal care and homecare items, including white goods, is particularly buoyant.

Harshit Bora, head of analytics at Bizom, which also tracks the FMCG sector, says at least 90-95 per cent tax cut would be immediately passed on and prices would go down.

K Ramakrishnan, the managing director of Worldpanel by Numerator (formerly Kantar), who has been tracking the FMCG markets for years, says FMCG companies would immediately pass on the tax cuts, desperate as they are for growth. “It has been a very bad three-four years for them. They have been crying about inflation and low consumption,” he says.

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For perspective, Ramakrishnan points out that FMCG growth in urban areas is 4 per cent and in rural areas 3.8 per cent in the year ending July 2025 – down from double-digit growths before the pandemic. Since the pandemic, monthly growth has been (-)0.5 to 6 per cent (the highest) in urban and (-)1 to 5 per cent in rural areas.

Harshit Bora, head of analytics at Bizom, which also tracks the FMCG sector, says at least 90-95 per cent tax cut would be immediately passed on and prices would go down. Those FMCG products which are price-point focused (selling sachets at Rs 1, Rs 5 or Rs 10) would raise the volume to match the tax cut while those which are weight-focused (selling items in packs of fixed weight) would cut the prices. Bora says, the price cut would raise purchasing power of people and the savings would be ploughed back – raising sales, not household savings.

The same enthusiasm is seen in the auto sector – another one witnessing sluggish growth.

Saharsh Damani, CEO of The Federation of Automobile Federation (FIDA), says the sector is looking forward to a boom and would immediately take advantage of the tax cut by passing it “entirely”. He is particularly optimistic about a pick-up in the sales of entry-level cars and two-wheelers. While the sale of entry-level cars has fallen far below that of high-end SUVs since FY22 – entry-level passenger cars accounted for 37 per cent of total car sales in July 2025, against 63 per cent for SUVs (not counting vans), the sale of two-wheelers is far away from the pre-pandemic FY19 level – 19.6 million units in FY25, against 21.2 million units in FY19 (all are manufacturing data from the SIAM).

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The only concern for Damani is about Rs 2,500 crore GST Compensation Cess that auto dealers have already paid (1 to 22 per cent of Cess over the GST) to the manufacturers (OEMs) for their current stocks. It would require amendments in the GST law to recoup – either adjusted against the CGST or IGST – and that would take months.

The GST discriminations may have ended, but not the tariff discriminations (Customs Duty). The Quality Control Orders (QCOs) continue to plague it too, hurting exports.

Textile and garment sector is buoyant too, particularly because the long-pending inverted duty structure (higher tax on inputs than finished products) and discriminatory tax on manmade fibres and yarns (synthetic) against cotton (natural) are gone.

The rejig removes the inverted tax structure on manmade fabrics and manmade fibres and yarns, attracting 5 per cent GST (from 18 and 12 per cent, respectively) – the same as cotton (5 per cent). The sector has two segments – manmade fabrics and natural (cotton) fabrics.

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It is this discriminatory taxation against manmade fibres and yarns that led to a sharp decline in the manmade or synthetic fabric segment. While globally about 60 per cent of clothing and 70 per cent of household textiles are made of manmade (synthetic) fibres, India’s exports are exactly the opposite – around 70 per cent is cotton-based clothing (the US is the big buyer) and 30 per cent synthetic. It now prevents India from diversifying textile and garment sectors (exports to the US are cotton-based fabrics).

The GST discriminations may have ended, but not the tariff discriminations (Customs Duty). The Quality Control Orders (QCOs) continue to plague it too, hurting exports. Cotton attracts zero-tariff now that the 11 per cent tariff was removed last month, prompting cheers from the US Department of Agriculture (USDA) – as it benefits their farmers.

Bhadresh Dodhia, former chairman of the Manmade and Technical Textiles Export Promotion Council, expects the GST cut to give a boost to manmade fabrics (MMFs) both in domestic and exports markets. But he has a reason to worry. After the rejig, the GST on garments priced above Rs 2,500 has gone up from 12 per cent to 18 per cent – even as the limit for 5 per cent GST has gone up from garments priced at Rs 1,000 to Rs 2,500.

Though the GST rates have been cut for cement (from 28 to 18 per cent) and other construction components like wood, marbles and granites etc., the real estate and housing sector is not upbeat.

The latter (raising the limit for 5 per cent GST to Rs 2,500) will see branded clothes becoming cheaper too. But a large informal sector would be left out of it.

The MSMEs are also set to gain.

The GST rejig cut rates from 12-18 per cent to 5 per cent on paper packaging, textiles, leather, and wood, faster refunds and rate rationalisation across textiles, handicrafts, leather, food processing, toys and products of bamboo, bagasse, jute boards. The inverted duty structures have been corrected in textiles and food processing.

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But Arun Kumar, former economic professor of the Jawaharlal Nehru University (JNU), says the GST cuts on the formal sector would “damage the informal sector further”. This would be particularly for micro and small units (accounting for 99 per cent of MSMEs ) as the business would continue to shift from the informal to the formal – just as it had happened after the GST was introduced in 2017. He foresees job loss and fall in consumption (demand) because of this shift.

Little cheers from other markets

Though the GST rates have been cut for cement (from 28 to 18 per cent) and other construction components like wood, marbles and granites etc., the real estate and housing sector is not upbeat.

The Confederation of Real Estate Developers’ Associations of India (CREDAI) issued a perfunctory statement, welcoming the reduction in tax on cement to say that it would save about 5 per cent in construction costs, but little else.

In sharp contrast, Sumit Bhartia, a Director of the County Group, dismisses any impact of the GST rejig in this sector. “In the past, cement companies didn’t pass on the tax cuts due to cartelisation. Three to four companies dominate the market and they will not reduce the prices,” he says.

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Bhartia sees no impact on the real estate and housing sector, which is going through a “sluggish growth” for several years. Cost of construction has gone up 1.5 times in the past three-four years but the disposable income hasn’t, he says, adding that while the demand for luxury houses has risen, that of affordable houses have fallen.

On the face of it, petroleum and petroleum products are out of the GST’s ambit but they attract both GST and non-GST indirect taxes – from Cess to Royalty, Customs, Excise, IGST, CGST, SGST, UTGST, Dividend/Direct tax and others (PPAC).

“In the Delhi-NCR region, there is a 40 per cent unfulfilled demand,” he rues – pointing to persistent demand. He also rues that the Input Tax Credit (ICT), which was applicable to the real estate sector until 2021, no longer exists to absorb rising costs. This is particularly unfortunate, he adds, saying that the sector is critical to both jobs and revenue generations.

Another is the insurance sector.

On the face of it, the GST cut on life and health insurances is a welcome step. The government expects that the elimination of 18 per cent tax would make insurance affordable and expand coverage. But the industry isn’t. In fact, industry watchers have warned that despite the tax cut, the premium could rise by 1-4 per cent because the ICT provision is eliminated and it can no longer absorb the rise in input services. The insurance sector can no longer claim a refund on the GST paid for inputs, like office supplies, infrastructure, accounting and paperwork services.

Coal, RE spared but not petroleum, petroleum products

The Centre’s contradictory policies towards energy continue.

On the one hand, it has reduced the GST on renewable energy devices and parts from 12 to 5 per cent to promote green energy. On the other, it has reduced the GST on coal, lignite and peat – the most polluting fuel – from 5 to 18 per cent.

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Ironically, though the renewable energy’s installed capacity share is more than 50 per cent, it is the coal, lignite and peat which provides 75 per cent of electricity needs for homes and industries.

But this rise comes with the elimination of GST Compensation Cess of Rs 400 per tonne for each.

Together, the two (5 per GST and Rs 400 per tonne of Cess) added up to 27 per cent tax. Hence, the net tax impact would be less – lowering the cost for households and industrial products and services – particularly the energy-intensive sectors like iron and steel, cement and concrete, food and beverages.

Then there is another anomaly.

Petroleum and petroleum products – also highly polluting fossil fuels – continue to be the money machine for the government (both the Centre and states).

On the face of it, petroleum and petroleum products are out of the GST’s ambit but they attract both GST and non-GST indirect taxes – from Cess to Royalty, Customs, Excise, IGST, CGST, SGST, UTGST, Dividend/Direct tax and others (PPAC).

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The GST rejig raised the GST on (a) supply of transportation of natural gas, petroleum crude, motor spirit, high speed diesel or ATF through pipeline from 12 per cent to 18 per cent (with ITC) and (b) composite supply of works contract and associated services, in respect of offshore works contract relating to oil and gas exploration and production in offshore area from 12 to 18 per cent (with ITC).

This will raise the cost of petroleum and petroleum products in upstream operations.

Loss from GST on imports

Imports attract Integrated GST – as imports are treated as inter-state trade (GST Council).

The Global Trade Research Initiative (GTRI) says, 24 per cent of GST revenue came from imports in FY25.

The import items have been subjected to both GST tax cuts and hikes. In case of almonds it was cut from 12 to 5 per cent (the US would be cheering, like the case with cotton mentioned earlier), for lithium-ion batteries from 28 to 18 per cent, diagnostic reagents from 12 to 5 per cent but paper and pulp hiked from 12 to 18 per cent and coal imports from 5 to 18 per cent.

The net impact on GST revenue, the GTRI says, is a shortfall of Rs 10,664 crore.

The total revenue shortfall is estimated at Rs 48,000 crore.

The Economic Survey of 2023-24 said, India Inc was “swimming in excess profit” but not investing.

The Centre and states may absorb such a small amount – but it would come at a cost. Either it would lead to lower capital and revenue expenditure, thereby lowering growth impetus, or raise market borrowing to skew the fiscal deficits.

Tax cut isn’t enough to boost consumption and growth

Here is a word of caution.

Tax alone is not sufficient to raise consumption or boost growth.

The financial conditions of households are too bad to significantly spur consumption.

The National Accounts Statistics show: household savings dropped from 23.6 per cent of GDP in FY12 to 18.1 per cent in FY24, household debts (annual change or “flow”) climbed up from 3.3 per cent of GDP to 6.2 per cent in FY24 and household net financial assets plunged to more than 40 years low of 5 per cent of GDP in FY23 and 5.3 per cent in FY24, up to which data is available (current prices).

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The PLFS of 2023-24 shows jobs have shifted to low-paying, low-productive informal agriculture and more women have joined the workforce, but are largely in unpaid work.

Wages have not only stagnated in the informal sector but even in cash-rich, high-profit-making India Inc (listed entities) – provoking Chief Economic Advisor (CEA) Ananth Nageswaran to lash out last year against “creeping informalisation”, low wages and contractual hirings. The Economic Survey 2023-24 said India needed to create 7.8 million jobs a year in non-farm sectors until 2030.

The corporate tax cut of September 2019 didn’t lead to higher capex (to boost growth).

The Economic Survey of 2023-24 said, India Inc was “swimming in excess profit” but not investing. On August 25, 2025, SBI chairman CS Setty said, India Inc was sitting on cash pile of Rs 13.5 lakh crore. Yet, private corporate capex has fallen from 16.8 per cent of GDP in FY08 to average of 10.9 per cent during FY13-FY24 (falling to 10.1 per cent in FY24).

The GST cut is unlikely to spur India Inc.

Here comes another bad news.

The first-ever quarterly bulletin of Unincorporated Sector Enterprises, released on September 3, 2025 shows, the number of enterprises in the informal manufacturing sector reduced by 4.7 per cent in April-June compared to January-March.

What all these developments do is cripple households’ consumption (and thereby economic growth, consumption being the main engine of growth). The Income Tax relief (taxable limit raised to Ra 12 lakh in February 2025) hasn’t spurred consumption.

In fact, the Q1 of FY26 saw consumption growing at 7 per cent – much lower than 7.8 per cent for the GDP (constant prices).