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Starting Monday, many Indian consumers could experience a slight easing of daily economic pressures.
Essential goods such as milk and bread, along with life and medical insurance policies and critical medicines, will be exempt from taxation. The Goods and Services Tax (GST) on smaller automobiles, televisions, and air conditioners is set to decrease from 28% to 18%. Furthermore, everyday items including hair oil, toilet soap, and shampoo will be taxed at a reduced rate of 5%, down from the previous 12% or 18%.
These comprehensive reductions are part of Prime Minister Narendra Modi’s significant overhaul of India’s Goods and Services Tax (GST) system, announced earlier this month.
The revisions are anticipated to simplify the tax structure and provide a boost to household consumption, which accounts for over half of India’s Gross Domestic Product (GDP).
The timing of these changes is particularly advantageous.
The lower GST rates coincide with the commencement of the extended festive season, a period when Indian consumers traditionally increase spending on various items, from vehicles to apparel.
This four-month window also accounts for a substantial portion of annual sales for consumer goods companies, including packaged food and clothing manufacturers.
The expectation is that these tax reductions will help offset some of the impact of the United States’ 50% tariffs on Indian goods, leaving consumers with more disposable income and stimulating the domestic economy.
These changes follow a $12 billion income tax relief package announced in February and lower interest rates from the Reserve Bank of India, all of which are expected to contribute to increased consumption.
Companies such as Reliance, consumer goods leader HUL, and automaker Mahindra & Mahindra are expected to pass on the benefits of lower taxes to consumers to stimulate demand.
Automobile manufacturers are particularly optimistic, with share prices rising between 6% and 17% since Mr. Modi’s August announcement. Dealerships are reporting increased inquiries amid existing unsold inventory.
At a Mumbai showroom of Hero Motocorp, India’s largest motorcycle manufacturer, a dealer informed the BBC that he anticipates sales to increase by 30–40% over the next two months compared to the previous year.
“The reduction in the cost for first-time buyers has led to a rise in inquiries and showroom traffic,” stated Ashutosh Varma, Hero India’s chief business officer, to the BBC. This is particularly evident for “more affordable models,” where price sensitivity is at its highest.
Vishal Pawar, a software developer visiting the showroom, mentioned he is considering upgrading to a 200cc motorcycle this year.
“The ideal time to make a purchase is when festive discounts and tax reductions coincide. I plan to make the purchase during the Dussehra festival,” Mr. Pawar explained.
Consumer goods companies also express optimism regarding a potential increase in demand.
Sabyasachi Gupta of Godrej Enterprises Group noted that the tax reductions, combined with a favorable harvest, could potentially expand the market for discretionary goods like air conditioners beyond metropolitan areas.
However, these changes have prompted a last-minute scramble among companies, including his own, ranging from reprinting labels to reflect the new prices and balancing production with uncertain demand.
“We are displaying both old and new labels side by side so that consumers can clearly see their savings,” Mr. Gupta told the BBC.
Among smaller brands and shopkeepers, awareness of the tax changes is spreading slowly, and many report lacking the resources to adjust pricing and packaging on short notice.
In Mumbai’s iconic Crawford Market, the city’s largest wholesale and retail hub offering a diverse range of products from spices to sequins, only a few shopkeepers were aware of the changes to GST rates.
Those who were informed expressed confusion.
Sheikh Rehman, a crockery store owner, stated that he was still negotiating with his suppliers regarding the management of taxes on existing inventory.
Next door, a bridal showroom expressed disappointment. The government has reduced the GST on garments priced below $29 (£21.2) to 5%, but items priced above that threshold will now face a higher levy of 18%.
Wedding outfits rarely cost less than $29, which means that nearly every ensemble in Mr. Naresh G’s store will be subject to a higher tax rate. This could have a ripple effect across the supply chain, impacting artisans, designers, and retailers alike.
“Indians allocate a significant portion of their budget to wedding attire, and with the wedding season about to commence, the tax increases could diminish some of the excitement,” Mr. Naresh commented.
However, the overall impact of the GST reductions is expected to be largely positive.
According to the Crisil ratings agency, the lower taxes will benefit approximately one-third of an average consumer’s monthly spending and enhance the purchasing power of the middle class.
The magnitude of the impact will depend on “the extent to which producers pass on the rate reductions to consumers,” Crisil noted in a report, adding that the impact will unfold over the current and next financial years.
These reductions, of course, come at a cost.
The government estimates that these measures could result in a revenue loss of approximately $5.4 billion this year. However, independent experts and ratings agencies like Moody’s anticipate a higher figure, with the strain on the exchequer potentially “even more pronounced” in the coming years.
These losses contribute to a challenging macroeconomic outlook. Federal tax revenues have shown minimal growth in the first four months, compared to a 20% increase last year, while spending has already risen by more than 20%.
With Delhi aiming to maintain its fiscal deficit – the difference between revenue and expenditure – in check, the Modi administration may need to slow down large-scale road and port infrastructure projects that have driven India’s growth over the past five years.
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