India’s Goods and Services Tax (GST) Council has recently floated discussions about possible rate cuts to boost consumption. The debate has sparked fresh questions in economic circles: will lowering GST rates actually trigger a broad-based consumption boom, or will it have limited effects?
Some Context
Since its rollout in 2017, GST has become the backbone of India’s indirect tax system. While it simplified compliance by subsuming multiple levies, the rates on several items — particularly in the 18% and 28% brackets — have often been criticized as high. With household budgets squeezed by inflation and slowing demand in sectors like automobiles, FMCG, and consumer durables, policymakers are considering whether a rate cut could unlock demand.
Why a GST Cut Could Help
Lower taxes generally mean lower retail prices, which can encourage consumers to spend more. In sectors such as automobiles, electronics, and housing materials, even a small cut can translate into significant savings for buyers. Historically, India has witnessed short-term demand surges when indirect taxes were reduced — for instance, during the global financial crisis of 2008–09 when excise duties were lowered.
Economists argue that a rate cut now could give a much-needed push to discretionary spending. With festive season demand around the corner, the timing could add to the momentum.
The Counterview
Not everyone is convinced. Critics warn that reducing GST rates could strain government revenues, especially when fiscal pressures are already high due to infrastructure spending and welfare schemes. The Centre and states rely heavily on GST collections, which have been robust in recent months.
Another concern is whether businesses will pass on the tax benefit to consumers. Past experiences show that companies sometimes absorb part of the gain to improve margins, diluting the impact on end prices. Moreover, sustained consumption growth depends on income growth and employment, not just temporary price relief.
Sectoral Impact
- Automobiles: Likely to be the biggest beneficiary. Industry bodies like SIAM have long demanded lower GST on cars and two-wheelers, arguing that the current 28% slab is holding back demand.
- FMCG and consumer goods: A cut on items in the 18% bracket could revive rural consumption, which has been sluggish.
- Real estate and housing materials: Lower taxes on cement and construction inputs could boost housing affordability.
| # | Pros of GST 2.0 | Cons of GST 2.0 |
|---|---|---|
| 1 | Boosts Demand: Lower prices encourage more spending. | Revenue Loss: Govt & states risk lower tax collections. |
| 2 | Sector Growth: Autos, FMCG, housing could benefit most. | Business Pass-Through: Not all savings may reach consumers. |
| 3 | Festive Push: Rate cut before festivals may accelerate sales. | Temporary Effect: Without income growth, boost may fade. |
| 4 | Short-term Stimulus: Can revive confidence in slowing economy. | Fiscal Pressure: May affect spending on infra & welfare. |
What Experts are Saying
Economists suggest that a calibrated approach may be wiser — reducing rates selectively for high-impact sectors rather than across the board. This would limit revenue loss while still encouraging consumption.
Some also argue that the government could pair a GST cut with other demand-side measures such as targeted subsidies, job creation programs, or credit support for small businesses.
The Bigger Picture
Ultimately, the impact of a GST cut will depend on how consumers respond and how businesses implement the changes. If prices visibly drop and confidence improves, India could witness a mini consumption boom. However, without structural income growth, the effect may prove temporary.
For now, the debate continues, with industry groups lobbying hard for relief and policymakers weighing short-term stimulus against long-term fiscal discipline.
