Marginal impact in Q2, GST Cut to boost consumption and growth for FY26, say economists

GST cut in October won't impact consumption in Q2

India’s consumption is unlikely to witness a sharp dip in the second quarter despite expectations of a GST rate cut from October, according to economists. Monetary easing by the Reserve Bank of India (RBI) and income tax cuts announced in the Union Budget are expected to support demand as the festive season begins.

“I don’t think Q2 consumption would be down due to consumers waiting for GST to come down. Festive season is expected to be good given the favourable monetary easing done by the central bank,” said Paras Jasrai, associate director, India Ratings and Research.

In his Independence Day address, Prime Minister Narendra Modi announced GST rationalisation as a “Diwali gift,” proposing the removal of the 12 percent and 28 percent slabs. Meanwhile, the RBI has delivered a 100-basis-point rate cut since January, bringing the policy rate down to 5.5 percent from 6.5 percent. The Budget also raised the income tax exemption limit under the new regime to Rs 12 lakh.

Economists noted that discretionary consumption could see short-term postponement, but the anticipated GST cut would more than offset the impact.

“In the short term there could be some postponement in discretionary consumption to H2FY26, in anticipation of lower rates. We expect the cut in GST rates to boost nominal GDP by 0.6 percent over 12 months,” said Gaura Sengupta, chief economist, IDFC First Bank.

The expected uptick comes at a time when economists project a 0.2–0.5 percentage point dip in real growth due to global uncertainties.

Reserve Bank of India in its latest policy review held to its growth forecast of 6.5 percent, despite worsening global outlook.

Consumer goods already improving

Consumer durables returned to growth in June after a contraction in May, while the fall in non-durables narrowed. A Moneycontrol analysis shows that production of consumer goods typically picks up ahead of the festive season.

In FY25, production of durables in the months before Diwali grew 8.6 percent versus 8.1 percent a year earlier, while non-durables rose 1.9 percent compared with a 1.4 percent contraction the previous year.

Jasrai added that July sales do not suggest a muted quarter, further reinforcing expectations that demand will hold steady until GST cuts take effect.