GST 2.0 boosts festive demand, but sustainability is key question mark

Rationalisation of Goods and Services Tax rates, which commenced in September, has provided a significant boost to consumer demand and manufacturing output during the recent festive season. However, it was yet to be seen if the demand will continue in future too.

Rolling out GST 2.0, the government had said that it will result in sharp jump in sales, especially electronics and consumer goods; reduced prices for key daily-use items; all adding up to a significant push to consumption which may even reflect in the GDP numbers for the current financial year.

While festive trends validate the benefits of lower taxes, the durability of this volume boost remains uncertain and is dependent on broader economic conditions.

As an outcome of the impact of the GST rate changes introduced from September 22, prices on essentials and improved affordability across key sectors have been brought down.

Boosted by stocking ahead of the festive season, manufacturing output accelerated in the month. The production of consumer durables saw a prominent sequential and year-on-year uptick.

The year-on-year growth in GST e-Way bill generation eased to 8.2 per cent in October. In fact, the GST rate changes have visibly impacted the prices. The core-Consumer Price Index, excluding gold, remained flat on a sequential basis in October, against a typical monthly increase of 0.4-0.5 per cent.

An Icra report evaluates impacts across key industries, including two-wheelers, passenger vehicles, tractors, commercial vehicles, fashion retail, insurance, Room Air Conditioners, budget hotels, cement, fertiliser, speciality chemicals, and upstream oil and gas.

The combination of GST rate rationalisation and festive demand is expected to support manufacturing growth. However, the stud. underscores a critical uncertainty. While the GST rationalisation may support demand for regular use/small-ticket items after the festive season, the sustenance of the buoyancy in demand for big-ticket items remains to be seen.

Furthermore, the report includes a crucial advisory, noting that a good part of the GST rate cut benefit is going to be neutralised by the star labelling requirements to be introduced from early next calendar year.

Now, there comes the caveat. A section of economists warns that India’s trade deficit would rise sharply and foreign exchange reserves would decline thereby weakening the Rupee compared to the Dollar.

This would increase inflation though it may help increase exports marginally. Establishing new markets takes time and other nations impacted by tariffs are also looking for markets. Actually, given the ongoing global trade disturbances, exports to other markets may be adversely impacted.

Revenue growth has been fairly weak and there are probably some constraints in terms of fiscal consolidation. We have seen some tax cuts as well, as per Moody’s Ratings, and that is additionally weighing on revenue growth. There is probably less scope for fiscal policy support for the economy.

Not to mention, net tax revenue in September was down at Rs12.29 lakh crore from Rs12.65 lakh crore a year ago.