GST 2.0: Boost or burden?
GST reforms need to be followed up with steps to ensure job creation and sustained wage growth. Else the gains may be short-lived
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Sep 11, 2025, 16:42 IST5 min
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Everyone loves a good deal.
Come September 22, shoppers around the country will see lower retail prices thanks to a tax cut by the government.
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In cutting the Goods & Services Tax (GST) and reducing the number of slabs from four to two (plus an additional 40 percent slab for ‘sin’ goods), the government has worked to kill two birds with one stone.
First, revive flagging consumer demand and give consumers an incentive to spend more. The consumer economy makes up about two-thirds of the gross domestic product and reviving sentiment (and spending) is one lever of growth. Second, go back to the original promise of making the GST structure simple and easy to administer. On both counts, changes should have a positive impact. It now remains to be seen how the consumer responds.
Soon after the announcement, companies rushed to reprice fast moving consumer products like soaps and shampoos as well as discretionary purchases like televisions and air conditioners (AC). These items are now at rates of 5 percent or 18 percent, down by at least 10 percentage points.
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The price cuts were more pronounced in automobiles where cars up to 4 metres and an engine size of 1500 cc are now at the 18 percent slab while those above this are at the 40 percent slab. Car companies have announced reductions of between ₹1 lakh and ₹4 lakh. Meanwhile, consumer goods companies rushed to retain old packaging but promised to offer the benefits of new prices to consumers immediately.
“In a consumption-driven economy this is an important move, and it will have an impact over time,” says Sachchidanand Shukla, group chief economist at Larsen & Toubro (L&T). The GST cut that put ₹48,000 crore coupled with the cut in income taxes that put about ₹100,000 crore in the hands of the consumer should lift sentiment over the next few months. Add another ₹200,000-300,000 crore on account of pay revisions for government employees and the number is significant.
The cut in GST comes at a time when Indian consumer sentiment had been depressed primarily on account of high inflation and poor wage growth. A look at the earnings of consumer companies provides an overview of depressed growth.
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Hindustan Unilever (HUL), India’s largest consumer goods company, has seen an annual revenue growth of 6 percent in the last three years. In the same period, profits have risen at 5 percent a year. Since this was a period when consumer price inflation was high, it is fair to assume that a large portion of the revenue growth came from price and not volume growth. HUL’s share price has delivered no returns in this period. Over the last year, the NIFTY FMCG Index is down 12 percent.
In the two weeks and counting since the cuts were announced, the markets quickly repriced stocks in consumer and auto companies. Maruti Suzuki is up 18 percent while HUL is up 5.6 percent. AC-maker Voltas is up 11.6 percent.
The important question to answer is whether the cuts by themselves will result in increased spending. On that, the jury is out. Saurabh Mukherjee of Marcellus Investment Managers points to the lack of job creation over the last five years. According to him, the number of formal jobs in India has stayed static at about 40 million. If we argue that each formal job creates five informal jobs, then the number rises to 240 million. Add another 200 million employees in agriculture and the number of people with any spending power is at about 450 to 500 million. The above cohort has seen stagnant wages and will likely benefit from the changes.
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The way consumer demand will play out depends on how households perceive the cuts. In the short term, lower prices on essentials and discretionary goods are likely to encourage spending, particularly in urban areas where salaried workers may respond quickly to increased disposable income. However, for large segments of rural and lower-income populations, where wages have been stagnant and job opportunities limited, the effect may be more muted. Demand recovery will likely be uneven, with higher-income groups driving initial consumption gains, while others may prioritise essential spending. Sustained growth will depend on broader structural reforms, job creation and improvements in wage levels rather than price cuts alone.
The GST cut brings with it both positive and negative effects. On the positive side, consumers are likely to benefit from increased purchasing power and improved sentiment, especially in sectors where price cuts are substantial. Businesses too stand to gain from a boost in demand, which could spur production and investment.
However, the flip side is a reduction in tax revenues, which may widen fiscal deficits and increase borrowing costs. This could potentially lead to inflationary pressures or reduced government spending in other areas. The rise in bond yields after the announcement reflects concerns over fiscal sustainability, even as policymakers hope that higher consumption will offset some of these pressures.
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Still, Mukherjee believes that the impact of job losses on account of the imposition of tariffs and a stagnant IT sector are likely to counteract any gains from lower GST. “We need to relook at education systems in order to prepare people for a world where salaried jobs are not the only way to success,” he says. A tax cut, according to him, is only one of the levers the government has.
For now, as companies and the government work on getting the benefits of lower prices to consumers, there is also the not-so-good side of reduced tax collections. In the week after the announcement of the rate cut, India’s 10-year bond yield rose 30 basis points to 6.5 percent. Shukla of L&T says he wouldn’t read too much into it as global bond yields are on their way up as markets fear that government spending has gotten out of hand.
In the pre-GST cut avatar, 14.3 percent was the revenue neutral rate for the Centre and states. Post the cut, it is likely to fall to 11.6 percent. It remains to be seen how soon the shortfall is made up.
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So, even as consumers rush to buy a new fridge, television or car, the broader challenge lies in addressing structural issues such as job creation and wage stagnation, and with it, fiscal sustainability. In the absence of a continued set of policy measures to address these, the GST cut may be the easiest of the tasks.
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