GST rate cut could set off consumption spike as economy sets eyes on faster track

Finance Minister Nirmala Sitharaman (Courtesy: PTI photo)

Hundreds of consumer items—from soaps to cars—could turn cheaper following the GST Council’s decision to rejig rates under two broad slabs—5 per cent and 18 per cent—raising prospects of propelling the broader economy into a consumption-led growth lane.

Domestic household spending has been one of the strongest edifices of the India growth story. The lower GST rates on consumer goods and the resultant lower prices could potentially set off a virtuous cycle of greater demand and cooling inflation, presenting a crucial opening to offset the hammering from the US tariffs by an expansionary domestic market.

Importantly, the GST rate rejig’s sweep is not limited to consumption goods alone. Prices of many intermediates such as cement are set to fall as the tax rate has been cut to 18 per cent from 28 per cent.

Cement is a crucial component for the real estate and the construction sector. The 10 percentage point cut in GST rates for cement should, ideally, lower the cost of building roads, ports, airports and houses.

More than bringing down the costs, infrastructure and construction projects have a strong multiplier effect by creating jobs  and creating direct and indirect income-earning opportunities across the geographies where the projects are located.

The timing of the GST rate rationalisation is vital. The new rates are set to kick-in from September 22, the first day of this year’s Navaratras marking the beginning of the festive buying season.

October to March also marks the `busy season’ in the construction sector, as monsoon retreats from the Indian landmass, enabling infrastructure and real estate projects to pick pace beginning from autumn and stretch upto early summers until May.

The GST rate cuts come less than six months after the new income rates came into effect from April 1 that finance minister Nirmala Sitharaman announced in the Union Budget 2025-26 on February 1. Seen in conjunction, these measures are aimed to catalyze growth by putting more money in people's pockets through tax breaks, and amplifying their purchasing power.

Under the new income tax slabs and rates, anyone with an annual taxable income of upto Rs 12 lakh (excluding capital gains income) will not have to pay any taxes. This, effectively, means that those with annual income of up to Rs 12.75 lakh will not have to pay any tax, including a standard deduction benefit of Rs 75,000.

Lower GST rates will also likely have a knock down effect on inflation. Producers are set to pass on the lower GST rates in the form of lower prices. This, in turn, could lower retail prices of hundreds of goods and show up in  lower consumer price index (CPI) in the coming months. CPI-based retail inflation is the primary marker that the Reserve Bank of India (RBI) tracks for its decisions on interest rates.

The RBI’s monetary policy committee (RBI) will keep one eye firmly on the retail price line, amid expectations that a lower CPI could prompt another repo rate cut in the next cycle. A lower repo—the rate at which RBI lends to banks—will bring loan EMIs’ as banks’ borrowing costs come down. This could add to the consumer buying sentiment as most consumer durables—from cars to Acs—are bought on loans.

In a way, by announcing wide-ranging changes in income tax and GST rates and slabs in 2025-26 the government has placed the bets firmly on India’s vast consuming salaried and middle class to power the economy, in a plucky drive to push growth amid global headwinds, notably emanating from the US tariffs.

The new growth doctrine is predicated on the assumption that higher disposable income and lower prices will stimulate demand for goods and services. This, in turn, could set off a cycle of investment as companies eventually start adding capacities to meet the extra demand.

The income tax and the GST rate rejig signals the government’s intent to walk the talk on  measures to accelerate growth, simplify tax rules, create jobs,  boost investment, and dismantle barriers to turn India into a vast market, less dependent on external factors and conditions.