Will India's consumption boom after GST 2.0 spark long-awaited private capex rush?

If you thought the Goods and Services Tax (GST) reforms that kicked off this week — with their rate cuts that has led to a decrease in prices for scores of items, was only meant to boost consumption, and thereby prop up the economy that will be hammered by the tariffs and penalties a temperamental US President, Donald Trump, has imposed on the country, you are missing the trees for the forest.

There is a bigger strategy, cynics could call it a last-ditch attempt, to kickstart the virtuous cycle of consumption fuelling production, which in turn drives investment, which strengthens the nation’s manufacturing hub aspirations.

"The recent GST rate cuts are already giving a tangible boost to consumption…(and) this rise in demand lays the groundwork for a potential revival in private capital expenditure,” said Manoj Mishra, partner and tax controversy management leader with the consultancy major Grant Thornton Bharat. “While businesses often wait for sustained demand and higher capacity utilisation before committing to large-scale investments, sectors such as durables and automotive are poised to respond faster, with OEMs and component makers scaling up production.”

The story actually goes back to before the days of the Covid pandemic, when Indian economy went into a tailspin, which some attribute directly to the Modi government’s tinkering with the status quo through drastic policy changes like GST, RERA and of course, demonetisation. Anyway, the government tried measures like corporate tax cuts then, followed, once Covid and Lockdown hit, with a deeper restructuring based on the ‘Atmanirbhar Bharat’ cornerstone and PLIs (production-linked incentives), which wooed industry to invest more and help the economy tide over the dip. Finance Minister Nirmala Sitharaman’s budgets following the pandemic consistently ploughed in sizeable amounts of money, running Rs 10 lakh crore and upwards into capital investment, primarily in investment, hoping private sector will follow suit.

That did not really happen, with the doyens of India Inc blaming it on the low consumption levels — we can invest in additional capacity only if there is demand, and demand is yet to pick up, they used to argue. Sitharaman took the industry to task more than once for not stepping up, but to not much avail.

All this while, the global situation got even more precarious. While the pandemic was pockmarked by a violent Chinese misadventure and alleged land grab in Ladakh that left India with more questions than answers on how to deal with the world’s newest superpower, things weren’t getting better elsewhere. Two bloody conflicts, one Russia’s incursion into Ukraine, and the other between Israel-Hamas re-wrote global equations, often leaving India in an uncomfortable middle. And Trump’s advent and his target practice on India was the last straw, with a double blow of 25 per cent tariffs and an additional 25 pc penalty, making Indian exports to the world’s most affluent market, on which hundreds of thousands of Indians depend for their livelihood in sectors ranging from textiles to jewellery, instantly unviable.

So after the corporate tax cut, massive restructuring leading to liberalisation of several sectors, a massive investment push of government capital and PLIs to woo companies, both local and international, to set up manufacturing, there wasn’t much to show, except for an Apple. Meanwhile, situation got acute, with China even restricting rare earths and other crucial raw materials needed for manufacturing at Indian plants, baring the Achilles heel of India’s Atmanirbhar dream.

Something’s gotta give, and for Modi and Sitharaman, it was time to bring out the brahmastra of sorts — a GST cut leading to consumption uptick, leading to private industry increasing their capacity by investing finally, which then attracts global biggies to invest in India.

Will Nirmala Sitharaman's strategy work?

It seems to be, if you see the flurry of shopping and private spending over the past few days since the (generally) lowered GST rates came into being on September 22. However, one needs to temper the excitement keeping in mind three factors — one, the rate cuts were timed with Navratras, which anyway is the start of the traditionally auspicious festive shopping period, not to mention the dates when both e-commerce majors Amazon and Flipkart started off their annual sales period. Second, whether the momentum of the sales will continue beyond the festive period of next one month (and an extended festive season which lasts till the New Year) remains to be seen.

And lastly, will Indians revert to their conservative habit of shoring up their habits with the new lowered consumer rates (plus the bonanza the budget’s raising of income tax limits offers them), or will they go shop-till-you-drop is something only time will tell.  

But Mishra believes the larger strategy of the increased consumption rates emboldening business investment could well happen — for one thing, it is not just lowered rates making shoppers happy, the many simplification in GST rules also helps businesses. “GST 2.0, with its rationalised rates and streamlined procedures, is set to boost public demand, creating a natural incentive for businesses to expand manufacturing capacities. Coupled with the RBI’s recent rate cuts, which lower borrowing costs and improve liquidity, private players now have both a demand push and a financial tailwind to invest,” he said.

“This surge will serve as a natural impetus for businesses to expand manufacturing capacities and leverage the government’s robust investments in infrastructure and capital expenditure over the years, and foster a conducive investment climate. Such an environment would generate a powerful multiplier-effect across sectors, reinforcing growth momentum,” Mishra explained.

The shoots may just be visible, with Hyundai reportedly deciding to raise its proposed investment in their new plant in Maharashtra from Rs 7,000 crore to Rs 11,000 crore — the idea is the lowered GST rates on small cars will lead to increased demand, which calls for increased manufacturing capacity. Other domestic corporates like Kirloskar are also said to put in money in new plants, and the government will surely be hoping that this will lead to a domino effect.