A customer inspects a refrigerator on display as a sales assistant looks on at a Croma electronics megastore, operated by Tata Group’s Infiniti Retail unit, during its official opening in Mumbai, India (Photographer: Vivek Prakash/Bloomberg)  

GST Rate Cuts To Add Shine To India’s Consumption Story, Say Economists

Private consumption, which has been a strong support for the Indian economy over the last few years, may get an added kick after a cut in indirect tax rates for a number of consumer goods.

Over the weekend, the GST council reduced the tax rate on consumer durables, including washing machines, refrigerators and television sets, from 28 percent to 18 percent. While the tax cuts will have a negative impact on the government’s finances, they could help keep private consumption strong, said economists.

The rate rationalisation is expected to boost consumption demand over the medium to long term as a fall in prices will propel demand and increase penetration of these consumer goods, said IDFC Securities in a report.

The brokerage house expects the tax cuts to push up output growth in the consumer durables segment and replace some of the demand that was being fulfilled by imports.

Consumer durables output rose by 4.3 percent in May this year, showed the industrial output data released earlier this month.

Since the benefits of the tax cuts have to be passed on to end consumers, urban consumption demand could get a boost during the upcoming festive season, said Aditi Nayar, economist at rating agency ICRA.

The most significant rate cuts have been in consumer durables categories with smaller ticket sizes, which could see stronger demand. In categories such refrigerators and televisions, the replacement cycle may not necessarily be altered by a tax cut, Nayar said.

The input tax credit that companies realise will determine how much of the benefit of the rate cut is passed onto the end consumer. There are some concerns of an inverted tax structure where tax on raw materials is higher than tax on final products.
Aditi Nayar, Principal Economist, ICRA

The Indian economy is seen growing by 7.4 percent in the current fiscal year as disruptions from demonetisation and GST fade. Steady consumption demand is expected to be complemented by a modest pick-up in private investment this year.

As a way to further strengthen the economy, the government has front-loaded spending and also tried to tackle concerns of agrarian distress. Earlier this month, the government announced a hike in the minimum support price for kharif crops. That decision, if implemented fully, is expected to boost rural demand. The cut in tax rates in consumer durables, meanwhile, will help urban demand.

Saugata Bhattacharya, chief economist at Axis Bank said that a tax cut on consumer goods is sure to boost consumption. However, he added that the magnitude of a pick-up in urban consumption would depend on a range of other factors as well, such as growth in disposable income.