India recently proposed major cuts in the Goods and Services Tax (GST). This step is expected to spur household spending in the upcoming festival season. Increasingly, the government has lowered the consumption tax on small cars, television receivers, and air conditioners from 28% to 18%. Other necessities like milk and bread, life and medical insurance, and life-saving drugs are all tax-free under the new law. Prime Minister Narendra Modi is currently at the helm of a massive overhaul of the GST regime. These provisions are intended to reduce the complexity of the tax code and increase consumer spending.
The other big change are cuts to taxes on personal care items. From now on hair oil, toilet soap and shampoo will attract lower GST at the rate of 5%. This is a dramatic reduction from current levels of 12% or 18%. The GST on clothing under $29 has been lowered to 5%. Products that go above that amount will be subject to a higher tax of 18%. We believe these strategic cuts will increase demand across the industry. This comes at a crucial time as the nation prepares for the extended holiday season on end.
According to the government’s own forecasts, these GST cuts would lead to a loss in revenue of at least $5.4 billion this year alone! Spending from households may be much higher according to officials’ estimates. Since it constitutes more than a third of India’s gross domestic product (GDP), this jump could more than compensate for the damages. Indeed, carmakers have watched their stock prices rocket up between 6% and 17% since Modi’s announcement in August. This increase is a sign, to be sure, of great investor confidence in the upcoming market resurgence.
Local dealerships around the country are reporting an increase in car shopper interest as the tides start to turn on unsold inventory. Ashutosh Varma, a representative from a major dealership, stated, “Easing the cost burden of first-time owners has increased enquiries and footfall.” And consumers are poised to spend big this holiday season. They rarely purchase anything from licensed dealers, whether that’s new cars or high fashion.
In Mumbai, Hero Motocorp’s showroom forecasts sales to skyrocket by 30-40% over the following two months. This is 11 percent growth compared to last year’s strong performance. Mr. Pawar, a prospective buyer, remarked, “The best time to buy is when festival discounts and tax cuts overlap. I’ll make the purchase during the Dussehra festival.” This excitement can be seen across consumers as they all look to maximize their benefit from these tax credits.
The timing of these GST cuts couldn’t have been worse, as it comes right in time for the festive season when Indians generally spend more. Mr. Naresh expressed concerns regarding potential tax hikes affecting spending habits, stating, “Indians spend a lot on wedding clothes and the season is just about to start. The tax hikes may take away some of the shine.” This makes the importance of consumer sentiment all the more vital as the holiday season approaches.
As we have previously noted, the government’s earlier actions laid solid groundwork for robust consumption growth. This is with the exception of a $12 billion future income tax giveaway announced in February and lower interest rates from India’s central bank. And retailers and manufacturers are riding that wave with high optimism. They hope these fiscal measures will increase demand for consumer goods over the next few months.