Dear Reader,
Great expectations are riding on this festive season. The usual festive cheer has been buttressed this year by the GST cuts, on the one hand, and the dovish monetary policy announcement, coupled with the Reserve Bank of India’s relaxing rules to support credit growth. Reports indicate strong growth in retail sales during Dussehra and the hope is that the demand boost will continue till Diwali at least. Traders in the equity markets are clearly betting on the festive spirit, as they have stepped up borrowing from brokers under the margin-funded trading window to new highs. As our columnist remarked, this Diwali will be a special one for traders. Investors should closely follow the Diwali spending trends.
RBI consumer confidence surveys provide clues about the strength of consumption demand. The latest survey shows rural consumer sentiment strong, but as my colleague Aparna Iyer wrote, urban India was still cautious at the time of the survey. However, the survey was carried out between August 28 and September 6, which means they didn’t capture the full effect of the GST rate cut announcement on September 3. The rate cuts have undoubtedly boosted sentiment further, as seen from the upbeat reports of retail buying during the Navratri and Dussehra festivals. We wrote that “with the festive season under way and consumption improving, the auto industry is set for a strong second half of FY26”. Indeed, festive sales have driven online credit card spending to an all-time high.
Apart from the GST cuts, there are other reasons too for increased consumption spending. These include lower inflation—the RBI survey of household inflation expectations for the year ahead, conducted last month, showed its lowest reading since September 2019. That should support urban consumption. Rural consumption, on the other hand, should get a boost from the good monsoons. Nomura notes that while there has been damage to standing crops in some regions due to excessive rainfall, kharif sowing is the highest in the past five years and while “some regions experienced flood damage, but it was minimal vs total sown area – production to remain strong”.
Also, while the Monetary Policy Committee did not cut rates at its meeting this week, we said “the RBI has enough spare arrows in its quiver, giving monetary policy room for future actions in case tariff disruptions persist and downside risks to growth deepen”. The RBI announced a plethora of de-regulatory measures aimed at boosting credit to the economy. For example, we pointed out this NBFC is set for re-rating as regulatory overhang eases.
These measures could lend additional support to consumption and then to investment demand as well. The RBI Bulletin’s State of the Economy report for September said, “The stage is set for a sustained pick-up in consumption demand in H2 and potentially for a virtuous cycle of higher investments and stronger growth impulses, overcoming persistent global uncertainties.”
The RBI may have nudged its growth forecast for FY26 higher to 6.8 percent, but the governor’s words struck a more restrained note: “Growth continues to be below our aspirations.” The engines may be humming, but they’re still not firing on all cylinders.
As TS Eliot wrote, “Between the idea and the reality….falls the shadow.” The RBI’s GDP forecasts show a slowing down of growth in Q3 and Q4 of the current fiscal year. GDP growth is now expected to be 6.4 percent in Q3 and 6.2 percent in Q4, compared to 6.6 percent and 6.3 percent, respectively, in its August forecast. To be sure, a large part of the reason is an adverse base effect, but then that was known in August as well.
Perhaps a bigger concern is nominal GDP growth and its impact on government finances. In its meeting this week, the MPC’s estimate of GDP growth this fiscal year is 6.8 percent while inflation is expected to be 2.6 percent -- that gives nominal GDP growth of 9.4 percent. At its August meeting, this estimate was 9.6 percent—6.5 percent real GDP growth+ 3.1 percent inflation. And at its April 2025 meeting, this figure was projected to be 10.5 percent—GDP growth of 6.5 percent + 4 percent inflation. The worry is — with lower nominal GDP growth, tax collections too are likely to be lower than projected.
Indeed, net tax revenues for the central government, up to August in this fiscal year, were 7.3 percent lower than over the same period last year. As a Barclays note by India chief economist Aastha Gudwani, titled ‘Fiscal Situation: Walking on Thin Ice’ says, “Fiscal deficit trajectory this year is facing concerns of slippage from the sizeable shortfall in income tax collection and foregone GST revenue. Tailwinds in the form of higher than budgeted non-tax revenue receipts and expenditure rationalization measures offer a cushion to adhere to target.”
That accounts for the rise in the government 10-year bond yields since the lows in June this year. If the government has to prune its spending to stick to its fiscal deficit target, then that would offset the gains in private consumption spending as a result of the GST cuts. That, along with the relentless selling by foreign investors and a glut of new issues, explains why the market is holding its breath.
Also, while GST cuts are welcome, they do not address the fundamental issue with consumption—the fact that, as Morgan Stanley economists have said, India is growing at only half the pace it needs to tackle its jobs crisis. As the RBI consumer confidence surveys in September 2025 show, 30.9 percent of rural respondents said their employment prospects had worsened in the past one year, against 36 percent who said their prospects had improved. And in urban India, 41.5 percent said their job prospects had worsened, more than the 35.3 percent who said they had improved. Growth without jobs is a house built on sand—unsustainable, no matter how strong the headline numbers look. If, as the Morgan Stanley economists say, the Indian labour market is facing a dual challenge of unemployment and underemployment, strengthening consumption is going to be a tall task.
For now, the economy is running on festive fumes, but it's still looking for a lasting fuel.
Cheers,
Manas Chakravarty
In case you missed them, here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity, and forex markets:
Stocks
WeWork India IPO, SBFC Finance, Bharat Dynamics, eMudhra, Endurance Tech, IKS Health, Voltas, SRF, Heritage Foods, KPIT
Markets
What do the new F&O regulations mean for market participants?
Jim Rogers on India, China, the Dollar, Gold and Silver: Where global markets are headed
Making sense of NSE IFSC's daily expiry options
Mutual funds stay loaded up on Indian pharma - even as Trump turns up the heat
Edelweiss’ Altiva Hybrid Long-Short NFO
Financial Times
There’s value in value stocks
Buffett faces off against himself in Occidental carve-up
Martin Wolf: A world with two predatory superpowers
How Nvidia’s Jensen Huang became AI’s global salesman
China’s Alibaba is a late entrant to the AI pantheon
Mohamed El-Erian: The influence of ‘geoeconomics’ is growing
Companies & Sectors
How should investors in FMCG stocks read unexpected negative effects of GST rate cuts?
Steel sector at a crossroads
How cement sector dynamics could play out, post GST rate cuts
Hindustan Aeronautics, Bharat Electronics holding on to their ground despite a rise in competition
Economy & Policy
NBFCs' faster loan growth hits policy transmission
Does China’s WTO stance shift queer India’s pitch?
Is India’s private sector faking its animal spirits?
RBI's risk-based deposit insurance premium: A prudent push, but the real trust booster lies in hiking coverage limits
Geopolitics & Geoeconomics
The Eastern Window: Chinese stocks defy Trump challenge with government-backed bull run
Tech & Startups
Startup Street: Startups' acquisition of legacy companies -- hard to digest?
Here's what draft online gaming act rules say
Demand for AI talent surges across India’s GCCs, up to 3,500 roles open
The H1B scare's impact on Indian tech hiring, seen from a recruiter's lens
Others
Personal Finance | The capacity to suffer is what creates wealth
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