Expert warns of EMI trap as Indians spend Rs 6 lakh Cr during Diwali

India witnessed its highest-ever festive trade during Deepavali 2025, with total sales touching ₹6 lakh crore — a historic surge that has sparked both celebration and concern. The Federal spoke to economist Prabhakar Krishnamurthy to understand the reasons behind this unprecedented boom, its connection to GST reforms, and whether India’s growing dependence on credit-fueled consumption is sustainable.

Edited excerpts:

This year’s Diwali sales touched ₹6 lakh crore — the highest in India’s history. What are the major items people bought, and what drove this record-breaking consumption?

Last Deepavali, India purchased goods worth ₹4.25 lakh crore. This year, that number has jumped to ₹6 lakh crore — a huge leap. The consumption basket shows that gold made up 10% of the total, electronics 25%, FMCG 12%, and automobiles 35%. Consumer durables and garments accounted for another 7%. This means there was growth across every sector.

This is what we call the Laffer Curve effect in economics — when tax rates are reduced, consumption tends to rise, and that’s exactly what happened this Diwali.

One of the major reasons for this surge is pent-up demand. After the GST rate reductions announced on August 15 came into effect from September 22, many people postponed purchases to wait for lower prices. When the new rates were implemented, demand exploded.

According to the Retailers Association, 72% of the sales boost was due to the GST cut. However, our economic analysis shows that 19.21% of the additional ₹1.3 lakh crore in sales can be attributed directly to GST rate reduction. People were waiting for prices to drop — once they did, consumption soared.

This is what we call the Laffer Curve effect in economics — when tax rates are reduced, consumption tends to rise, and that’s exactly what happened this Diwali.

Automobile sales also surged this season. What explains that boom?

The automobile sector forms the backbone of India’s economy, and this Diwali saw a major push driven by EMI-based purchases. About 70% of all automobile sales happened through EMIs. Banks and NBFCs disbursed nearly 1.16 lakh loans specifically for vehicle purchases.

Without these loans, the high-end car segment wouldn’t have seen such strong growth. Clearly, credit availability has played a crucial role in fueling this historic consumption.

Union Finance Minister Nirmala Sitharaman said that consumption surged after GST 2.0 reforms. But with so much EMI-driven spending, should we be celebrating this boom or worrying about a debt trap?

Both perspectives are valid. While the surge in consumption is good for the economy, the growing EMI dependence is a concern. Salary growth in India has not kept pace with the rise in household credit.

RBI’s household balance sheet shows 27% growth in debt, but salaries have only grown between 8–18%. In many parts of North India, people didn’t even receive bonuses this year — some companies distributed Soan Papdi instead, which employees reportedly threw away in protest.

This imbalance shows that while consumers are buying more, their income growth is lagging. To sustain consumption, comprehensive labour reforms are needed to boost wages and purchasing power.

So, the average Indian’s debt is increasing faster than their salary?

Yes. This widening gap can lead to more loan defaults over time. For instance, India’s credit card NPAs (non-performing assets) have already reached 28%. Since credit cards are unsecured — not backed by collateral — this poses risks to banks and the broader financial system.

While we celebrate Diwali here, China also benefits economically, as it supplies most of our lighting products. For the past five years, 70% of Deepavali items sold in India have been Chinese-made.

We now see individuals juggling multiple loans — taking one loan to repay another. This cycle of borrowing to manage existing debt indicates a “debt cycle”, not sustainable financial growth.

Such a cycle can only stabilize if the economy grows at 10% or more. Unfortunately, our current growth rate is around 6%, and the IMF projects it could fall to 6.2% next year. That’s not enough to offset the rising household debt burden.

The Confederation of All India Traders (CAIT) said the “Vocal for Local” campaign boosted sales of Indian products. Did that play a role?

Yes, 87% of consumers asked for Indian-made products this Diwali. However, identifying what counts as “Indian” isn’t straightforward. For example, Hyundai cars are manufactured in India but are a Korean brand.

Similarly, while many consumers chose “Swadeshi” options, the supply chain for several products — especially Diwali lights and decorations — still depends on China. We imported nearly 700 million LED lamps from China this season alone.

So, while we celebrate Diwali here, China also benefits economically, as it supplies most of our lighting products. For the past five years, 70% of Deepavali items sold in India have been Chinese-made.

Until India strengthens its domestic supply chains, complete “Swadeshi” self-reliance in festive goods will remain a challenge.

India currently has a $100 billion trade deficit with China. Can that be reduced?

We need to look for ways to balance trade by exporting more to China — products like shrimp and other goods that face high tariffs in the US could be diverted to Chinese markets. This would help offset our negative trade balance, which currently stands at about $100 billion.

How much credit can be given to GST 2.0 reforms for this record-breaking festive season?

Around 20% of the sales growth can be attributed directly to GST 2.0 reforms, and another 20% to credit expansion by financial institutions. Combined, these factors explain roughly 40% of the overall consumption boost.

The shift from four GST slabs to two simplified tax structure has reduced confusion and litigation. However, the new 40% slab for luxury and sin goods — such as pan masala (Panparag) — hasn’t yet been implemented.

The pan masala market alone is worth ₹45,000 crore. The rate hike from 28% to 40% was deferred, possibly to please certain regional lobbies, especially in North India where such products are widely sold. In Tamil Nadu, of course, these are banned.

So, overall, how do you see this year’s Diwali sales in economic terms?

This Diwali was historic in terms of sales volume and diversity of spending. The GST reforms, credit availability, and pent-up demand have together fueled this boom. However, the debt-fueled consumption model is not sustainable in the long run unless income growth catches up and economic expansion crosses 8–10%.

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