The Great Stimulus: Can GST Cuts Kickstart Consumption?

Business Remedies | Charu Bhatia | India’s domestic consumption, a critical engine of GDP, has long struggled under high inflation, rising taxes, and squeezed disposable incomes. Over the past six months, the government has rolled out a series of measures, from income tax cuts and repo rate reductions to now sweeping GST reforms, to revive demand. The question is whether these initiatives will finally spur a consumption boom.

The FY26 Union Budget kickstarted the push with income tax cuts for individuals, complemented by a cumulative 100 basis point repo rate reduction by the RBI, lowering borrowing costs for households and businesses. Building on this momentum, the government announced GST rationalisation on Independence Day, slashing rates from five slabs to two primary rates of 5% and 18%, with a 40% levy reserved for ultra-luxury and sin goods. The reforms, effective September 22, target daily essentials, consumer durables, automobiles, and insurance, coinciding with the festive season, a period historically associated with heightened spending.

Economists see multiple drivers behind the move. Sacchidananda Mukherjee of NIPFP notes that while political considerations, such as state elections, play a role, the economic necessity is clear: with external demand under pressure, particularly due to recent US tariffs, boosting domestic consumption is crucial to sustaining GDP growth above 6.5%. Private final consumption, comprising roughly 57% of GDP, has been patchy post-COVID, and the government hopes the GST cuts will not only stimulate spending but also encourage private sector investment, which has remained cautious despite rising capacity utilisation in manufacturing.

The structural reforms accompanying the rate cuts, simplified registration, resolution of inverted duty structures, faster refunds, and export-friendly measures, are designed to ease compliance and benefit MSMEs and exporters. Analysts say these changes improve liquidity, reduce uncertainties, and allow companies to focus on pricing, supply chain efficiency, and expansion. For the first time, GST is emerging less as a compliance burden and more as a growth catalyst.

Businesses are responding by passing on the benefits to consumers. Automakers and consumer durables firms, such as Tata Motors, Hyundai, Panasonic, and Bata India, have announced price reductions or incentives. In FMCG, firms are adjusting packaging and pricing strategies to reflect lower tax rates. While some items, like apparel over Rs 2,500, face higher rates, the overall sentiment is optimism.

Yet, concerns remain. States, particularly opposition-ruled ones, fear revenue shortfalls, estimated at Rs 48,000 crore annually. Transition issues, inventory management, and consumer buying patterns during the festive season add complexity. Still, economists project that if fully passed on, the GST rationalisation, combined with earlier measures, could provide a 0.6% GDP stimulus, potentially boosting private demand by up to Rs 2 lakh crore in FY26.
As India navigates global trade challenges and domestic uncertainties, the GST cuts signal a strategic pivot: stimulating consumption while supporting businesses, MSMEs, and exporters. If executed effectively, the reforms could mark a turning point in the post-pandemic growth trajectory.

Written & Edited By:

Charu  Bhatia