We can count on India’s GST reset to re-spark consumption

What looks like a technical rearrangement of slabs is in fact a powerful reset that could change how households spend, companies set prices and the economy grows.

The headline is price relief where it matters most. Everyday goods—like soaps, shampoos, packaged foods, bicycles—shift to the 5% bracket. Cement, long burdened at 28%, moves to 18%, cutting construction costs. Farm equipment and irrigation tools also drop to 5%, giving a boost to rural capex. Life-saving drugs go down to 0–5%, while health and life insurance premiums are exempt altogether.

In one stroke, the reform touches both mass consumption and social welfare. For the bottom 40% of households struggling with inflation, the tax cut translates into immediate breathing room.

Urban discretionary demand, which has wavered since the pandemic, should strengthen. Large appliances—ACs, dishwashers, TVs above 32-inch screens—shift from the punitive 28% slab to 18%. Two-wheelers and small commercial vehicles also benefit. Lower sticker prices and loan repayment instalments could nudge lower middle-class households earning about ₹5-10 lakh annually to upgrade rather than defer.

That psychological shift is crucial. India’s urban consumer has been cautious, squeezed by high financing costs and food inflation. A GST-led price reset, coinciding with the festive quarter, offers exactly the kind of trigger that can unlock pent-up demand.

Cheaper cement deserves special attention. Few products have such a wide economic footprint. At 28%, cement was a textbook case of tax distortion—hurting both housing affordability and builder margins. A cut to 18% changes project viability, especially in affordable housing where every rupee counts. It lowers costs for buyers, improves returns for developers and sets off ripples across sectors like steel, paints, tiles and logistics.

If the benefit is passed on faithfully, India could see a mini-cycle in construction and home improvement, with the attendant job creation and credit flows.

The healthcare and insurance changes, though less flashy, may prove equally consequential. By reducing GST on essential medicines and exempting individual insurance, the council has aligned taxation with social need. Cheaper coverage will encourage adoption of health and life insurance, long a policy priority.

Wider penetration improves household resilience to shocks and reduces reliance on government schemes. This is one reform where economic and social logic converge.

Of course, not everyone gains. The 40% slab, aimed at casinos, high-ticket-price sporting events, gaming and luxury vehicles, will squeeze margins and reduce demand in some of those niches by design.

The council is signalling a clear philosophy: encourage mass consumption but disincentivize sin and luxury. For the wider economy, the negative spillovers are minimal. For the affected industries, however, it is a sharp adjustment that may force business model changes.

Equally significant are the compliance reforms bundled with GST rate cuts. Risk-based provisional refunds, including for inverted duty structures, promise faster cash-flow relief for exporters and small businesses. Registration rules have been simplified for small, multi-state sellers. And a change in ‘place of supply’ rules makes India’s services exports more competitive.

These steps may not grab headlines, but they address irritants that have hampered GST’s credibility since launch.

The macro implications are positive on several counts. First, inflation: if companies pass on the cuts, headline retail inflation could fall by up to a percentage point over the next year. That makes more policy space for the Reserve Bank of India, with its repo rate at 5.5% currently and growth risks tilted downward. Another rate cut in 2025-26 is now more plausible.

Second, growth: the reform tilts India’s GDP mix toward domestic consumption, housing and small-business activity—sectors with high multipliers. Early estimates suggest an incremental GDP lift of a few tenths of a percentage point. That may sound modest, but in a $4-trillion economy, it is meaningful.

There will be a revenue hit in the short run, but collections are already buoyant at around ₹2 trillion a month. Higher volumes and better compliance should cushion the blow. The political economy risk lies with states, some of which remain dependent on compensation revenues. Managing their fiscal adjustment will be critical to sustaining the reform’s credibility.

The larger question is execution. The council can cut rates, but it cannot ensure companies pass them on. If businesses pocket the gain, the consumption story weakens and regulators may have to intervene. Refund and registration reforms must be implemented quickly to ease stress among small businesses. And state finances need careful handling to avoid backsliding into rate tinkering. In short, the spirit of the reform must survive the grind of implementation.

Still, it is hard to overstate the importance of this reset. For years, GST has been criticized as complex, distortionary and poorly administered. By slashing rates on mass-market goods, simplifying slabs and fixing compliance pain-points, the council has repositioned GST as a growth instrument rather than just a revenue tool. The timing is fortuitous: India’s consumption story has been uneven, rural demand fragile and urban spending cautious. This reset could be the catalyst that shifts sentiment, strengthens real incomes and ignites a new cycle of demand.

Eight years on, GST finally feels like it is maturing into what it was meant to be—a simple, broad-based tax that fuels rather than hinders growth. If implemented well, the new structure could do more than lower prices. It could restore confidence in the tax regime, deepen formalization and provide India’s economy with precisely the spark it needs at a delicate moment.

The author is managing director and chief executive officer of People Research on India’s Consumer Economy.