The Modi government’s much-touted Goods and Services Tax (GST) reforms are live now, and of course, the proof of the pakora is in the eating. The expectation all around is a decrease in prices, especially of daily essentials, which will spark off that much-delayed resumption of consumption that the government desperately craves but has eluded for years now.
The theory, on the face of it, is simple enough — his Independence Day address to the nation from the ramparts of the Red Fort this August 15 coming under the shadow of the quick one, his ‘fraand’ across the seven seas pulled on tariffs, PM Modi needed a brahmastra as he headed into elections in Bihar in the autumn. The solution? A kill-many-birds-with-one-stone GST rate rationalisation that the middle-classes could lap up and had been overdue anyway. And the timing couldn’t have been more perfect, slated to come into effect on September 22, the day that the traditionally auspicious festive season starts with Navratri heading to a peak with Diwali next month, which, pretty conveniently, is also the shopping high season in most parts of the country.
But, as they say, there is many a slip between the cup and the lip. The biggest fear is, of course, unscrupulous Indian business leaders not passing on the benefits of the end-consumer. There is also a fear, though no one’s voicing it loudly, of how much of a splurging spree the Covid and post-Covid ‘shaken and stirred’ Indian aam aadmi will indulge, beyond perhaps the initial euphoria and the festive season staples.
Finance minister Nirmala Sitharaman had declared that the tax slab rejig will infuse 2 lakh crore rupees into the economy, leaving people with more cash in hand. This comes from the rationalisation which sees the four slabs (plus one if you include the top tier category items which attracted additional cess) streamlined into two (plus an additional 40% and some for ‘sin’ goods) slabs. More importantly, 99% of goods under the 12% slab have moved into the 5% slab, while 90% of the goods under the 28% slab have dropped down to 18%.
But unbeknownst to most, there is a lot at stake going beyond getting ordinary people to loosen their purse strings, say go for that small car which could give even a one lakh rupee margin in some cases. Anything from electronic items to other items that top the festive shopping will come with a price cut, not to forget the move of many daily staples into either zero GST or at the nominal 5% slab.
On the face of it, GST revenues have only been on the up and up — what was just above 7 lakh crore rupees in the financial year 2018 has now gone up to more than 22 lakh crore in 2025.
But the numbers hide one crucial, worrisome, factor.
Inequality
While GST collection has gone up and up, what it glosses over is how by being a universal indirect tax that is applied equally to the rich as well as the poor, it actually contributes to inequality.
“Since GST does not depend on the income of the taxpayer, it is inherently regressive. Not surprisingly, a much higher proportion of total GST collected comes from the lower half of the income distribution, highlighting its unfairness,” economist Ajit Ranade wrote last year, adding, “The rate of GST has to be much lower…and dependence on income tax has to increase. India certainly needs to widen its income tax net. We have only 7 income taxpayers for every 100 voters as per the Economic Survey.”
The government at least seems to have heeded this advice partially, by setting out to rationalise the GST rates, but at the same time also increasing income tax limits from this financial year onward (the benefits of which will be visible for at least middle-income earners in urban India soon). But why?
The fact is that if income inequality has always been a stark reality of India from the feudal times and had gone mainstream since Liberalisation, the string of policy measures over the past few years — from demonetisation in 2016 to measures like corporate tax cut to combat the economic slowdown of 2018-19 period and of course, the ‘Atmanirbhar Bharat’ restructuring during Covid, widened the divide. This K-shaped growth led to a boom in conspicuous consumption by the haves, reflected in trends like ‘revenge travel’ as well as sales of premium homes and cars shooting through the roof.
As for the have-nots, going has not just been tough; it has been pretty unkind. This distress in urban India was almost glossed over as those with the means spent massively, but in the rural economy, it stuck out like a sore thumb. While back-to-back good crops and government schemes have helped turn things around in rural parts of India, the same could not be said about urban Indians, who are crucial when it comes to pushing consumption.
And why is urban Indians spending so important?
Consumption
Some countries are export powerhouses, while some economies depend on other specialisations — Singapore, for example, made its riches as a point of international trade and commerce. But India, with its low industrial index and high dependence (if you take the number of people employed in it) on agriculture, depends crucially on its massive domestic market, and the boost it gets from ordinary people spending. And while the overall GDP has been going up, this consumption pattern has also been on the up and up — peaking at 64% in 2024, though the government says it has tempered to 61% in the financial year 2025 (though being inordinately high).
While consumption can help GDP grow, ideally it should also be investment in industries making goods that can be traded both internally as well as exported, thus helping the nation grow up the value chain. But for India, for all the tall talk of ‘Atmanirbhar Bharat’ and Apple and others establishing factories for the global market in South India, that has not materialised.
And now, with Trump’s tariff torture set to short-circuit India’s nascent export growth, there is a very real fear of not just manufacturing, but consumption itself faltering — there are hundreds of thousands of people depending on export-oriented businesses, not just services (like IT) but also mass-employment industries like textiles. With all the geo-strategic uncertainties painting a big question mark over India’s growth through exports and not just goods but also services (like Trump’s one lakh dollar whammy on H1B visas that will further torch the already AI-hassled IT services sector of India) the government probably had very few options in front of it but to try boosting domestic consumption in the hopes of boosting the nation’s bottom line.
What everyone wants
So the shopping trends for the next few days will determine if the Modi government’s gamble — first with raising the income tax slabs and now with GST rationalisation, will spark off a consumption boom that will make up for all the beating we may (or may not) take on the trade, tariff and export front, as well as the hesitancy still shown by India Inc in making the kind of massive capex the way government was hoping for over the past few years through its own heavy duty spending on infra.
Meanwhile, if consumers are happy with prices lowered, it augurs even better for the government that is going into crucial elections as early as in a few weeks' time, as well as the breathing time it needs to handle the whammy after whammy Washington and Beijing is serving up to New Delhi. Whoever thought a good Diwali season could be a matter of national geo-strategic policy?