How GST cuts and a young population are reviving India’s economy

Just ahead of this year’s Navratri, the Union government overhauled the goods and services tax regime. The automobile sector, which was struggling with low demand and unsold inventory, was the biggest gainer from the move, as the GST rate on small passenger cars—sub-four-metre models with engines up to 1,200cc—was slashed from 28 per cent (plus additional cess) to 18 per cent. The GST on two-wheelers up to 350cc, commercial goods vehicles and buses was reduced to 18 per cent from 28 per cent. The GST reduction also covered several consumer goods. Items of daily necessity, leather products, footwear, handicrafts and many food products saw their tax rates cut from 12 or 18 per cent to just 5 per cent. For several food items, the GST was reduced to nil.

Consumer demand had been subdued over the past few quarters, and urban consumption had taken a clear hit. The government hoped that reducing GST rates, alongside earlier income tax cuts and the Reserve Bank of India’s (RBI) interest rate reductions, would revive consumer demand.

If festive season sales are any indication, those efforts appear to be paying off. Overall automotive retail sales were up 40.5 per cent year-on-year in October 2025, from 28.63 lakh units to 40.24 lakh units, according to the Federation of Automobile Dealers Associations (FADA). Most passenger vehicle manufacturers have reported strong growth this season. Maruti Suzuki’s domestic wholesales in October rose nearly 10 per cent and they were up 20 per cent in November. Tata Motors saw its domestic passenger vehicle sales surge 27 per cent in October and 22 per cent in November.

“It shows that the government is aware of what is happening in the industry, especially in the small car sector—how it has affected a large portion of the middle class and the overall impact on manufacturing and employment,” said R.C. Bhargava, chairman of Maruti Suzuki. He described the GST cut as a “timely” move that has changed consumer sentiment. “People now feel that the government has really done something to make safe, convenient transport affordable for a much larger section of the population,” he said.

Industry executives believe this is not a short-term spike. “This is not about what happened this week or this season. This will echo for a long time to come—not only for the automobile industry but across sectors. People’s appetite to shop has increased. This is not only due to GST reforms but also because of the earlier income tax cuts,” said C.S. Vigneshwar, president of the Federation of Automobile Dealers Associations.

The revival follows a sluggish period—between April and September 2025, passenger vehicle retail sales rose just 3.7 per cent, and two-wheeler sales were up 3.1 per cent, according to FADA data.

Fast-moving consumer goods (FMCG) companies, too, had experienced slowing demand. Hindustan Unilever (HUL), maker of Surf detergent and Red Label tea, reported just 2 per cent volume growth between April and September. Godrej Consumer Products saw 3 per cent growth in the July–September quarter. Urban demand had remained weak, with many consumers postponing purchases, awaiting the GST cuts.

Industry executives are now optimistic that lower prices will leave more disposable income in consumers’ hands. “FMCG consumption has benefited from net disposable income and improved consumer sentiment. Both these elements will be supported by this GST transformation. This will augur well for consumption. We’ve already had monetary easing and direct tax benefits. Inflation, including food inflation, has come down meaningfully, and this GST change adds to improving macro conditions,” said Ritesh Tiwari, former chief financial officer of HUL and currently the global head of M&A and treasury, Unilever Plc.

The pick-up in consumer demand is reflected in GST collections. Despite the rate cuts, overall GST collection in October rose 4.6 per cent to Rs1.96 lakh crore from Rs1.87 lakh crore a year earlier. November GST collections came in at Rs1.70 lakh crore, up 1 per cent from Rs1.69 lakh crore a year ago.

“Evidence from earlier GST rate changes—in July 2018 and October 2019—suggests that rationalisation does not weaken revenue collections. It typically leads to a temporary adjustment phase followed by stronger inflows,” said Soumya Kanti Ghosh, member of the 16th Finance Commission and group chief economic adviser at the State Bank of India. He said the rationalisation should be viewed as a structural reform—simplifying the tax system, reducing compliance burdens and encouraging voluntary compliance, thereby widening the tax base.

Digital transactions also mirrored rising consumption. Unified Payments Interface (UPI) transactions hit a record 20.7 billion in October, up 3.6 per cent month-on-month. In value terms, UPI transactions worth Rs27.28 lakh crore were recorded, a 9.5 per cent increase over September. During the three days of Dhanteras and Diwali, average daily UPI volumes touched 736.9 million.

Retailers, too, had reason to cheer. “We recorded nearly a 20 per cent increase in footfall across our malls this festive season. Categories such as beauty, jewellery, home décor and entertainment performed well, while our luxury portfolio saw 14 per cent growth,” said Pushpa Bector, senior executive director and business head at DLF Retail. “This steady rise reflects improving consumer confidence and a renewed appetite for experiential retail.”

According to the Confederation of All India Traders (CAIT), Diwali sales alone touched Rs5.4 lakh crore in goods and Rs65,000 crore in services—a 25 per cent rise over last year. About 72 per cent of surveyed traders attributed the higher volumes to reduced GST on daily-use items, footwear, garments, confectionery, home décor and consumer durables.

India’s economy grew 6.5 per cent in 2024–25—the slowest in four years, though still the fastest among major economies. Global factors, including heightened geopolitical tensions, contributed to this slowdown.

Donald Trump’s tariff war resulted in India’s exports to the US—the country’s largest export market—falling 37.5 per cent between May and September 2025, according to the Global Trade Research Initiative. The exports dropped from $8.8 billion to $5.5 billion during the period.

The uncertainty has also slowed software services exports, with speculation that the US may introduce an “outsourcing tax”. Economists say this makes robust domestic demand critical for sustaining growth.

While global headwinds persist, the domestic consumption push—fuelled by GST and tax cuts—is expected to offset much of the impact. Reflecting this optimism, the RBI raised its GDP growth forecast for 2024–25 to 6.8 per cent from 6.5 per cent. The International Monetary Fund (IMF), too, revised India’s forecast upward to 6.6 per cent. In fact, GDP grew at a much faster 8.2 per cent in the July-September quarter.

Chief Economic Adviser V. Anantha Nageswaran noted that the direct tax relief announced in the budget, simplification of tax processes and GST rate cuts together have lifted GDP growth prospects to around 7 per cent in real terms. “When we wrote the Economic Survey in February, we expected 6.3–6.8 per cent growth. Then, when tariff developments hit us, we thought it might fall to 6 per cent. But timely policy measures have placed us in a comfortable position,” he said end of October.

Inflation has cooled sharply. Consumer price inflation fell from 5.49 per cent in September 2024 to 1.54 per cent in September 2025 and further to 0.25 per cent in October—aided by lower food prices and GST cuts. Lower inflation could lift consumer confidence and spur spending.

The benign inflation outlook, coupled with the US Federal Reserve’s recent rate cuts, gives the RBI room to ease policy further. That could further encourage big-ticket purchases.

Economists at Bank of Baroda estimate total festive and wedding-related consumption this year could reach Rs12–14 lakh crore. “While there are external challenges due to tariffs, India remains a consumption-driven economy, insulated from global headwinds. The recent GST changes are a major positive for consumption growth,” they said.

Their analysis shows that in the October–December 2025 quarter, the food and grocery segment recorded sales growth of 14 per cent. Clothing and footwear spending is projected at Rs2.8–3 lakh crore, and the automobile and electronics sectors could each see spending of Rs1.5–2 lakh crore. Weddings could contribute an estimated Rs6.5 lakh crore, with around 46 lakh ceremonies expected this season, according to CAIT.

With consumption now on the upswing, economists believe the government can moderate its capital expenditure. “Growth drivers are likely to shift from public expenditure towards private consumption, complemented by a gradual revival in private capex during the second half, helped by GST and income tax cuts as well as monetary easing,” said Christopher Wiegand, group head, economics and data, DMI Finance.

However, questions remain about the sustainability of this consumption wave once festive enthusiasm fades. “If you look at big-ticket items like automobiles, there has been a significant price drop. The GST cut is not going to reverse, so the lower prices will persist next year as well. Some impact will spill over into the next year,” said Dharmakirti Joshi, chief economist at Crisil.

India’s expanding middle class will be the biggest beneficiary of these measures. As the number of affluent Indians rises, discretionary spending will increase, making India one of the world’s largest consumer markets.

According to Franklin Templeton Asset Management, India’s private consumption has doubled to $2.1 trillion in 2024 from $1 trillion in 2013, outpacing China, the US and Germany. Between 2024 and 2030, India’s nominal GDP is projected to grow at 11 per cent annually, reaching $7.3 trillion. Consumption is expected to contribute 60 per cent of that growth, making India the world’s third-largest consumer market by 2026.

With over 700 million Gen Z and millennial consumers, India has the largest young cohort globally. Franklin Templeton estimates that the number of affluent Indians earning over $10,000 annually will exceed 100 million by 2027, creating vast opportunities for premium and luxury products across categories—from automobiles and electronics to fashion, travel and wellness.

Consumer goods makers are already seeing rapid growth in their premium segments and are scaling up offerings—from soap bars to high-end skincare. “By enhancing affordability, the reforms are expected to boost disposable incomes, uplift consumer sentiment and unlock meaningful opportunities for premiumisation across categories,” said Priya Nair, MD and CEO of HUL.

Franklin Templeton estimates that premium haircare and body wash products have grown at 15–16 per cent annually over the past decade—twice the pace of mass-market categories. A similar trend is visible in electronics and appliances, where premium products are expected to grow at 13 per cent annually through 2029, compared to 7 per cent for the volume (mass) market. “Premiumisation is set to play a pivotal role in India’s evolving consumer landscape, driven by rising disposable incomes, shifting preferences and a growing middle class. The luxury goods market is projected to grow 20 per cent annually, reaching $200 billion by 2030,” it noted.

This, analysts say, marks a structural reset powered by a young, aspirational population. Yet, sustaining it will depend on the creation of high-quality jobs. “To sustain this over the long term, you need higher employment opportunities and rising household incomes,” said Crisil’s Joshi. “Greater per capita income and more jobs will mean a larger share of the population participating in the growth process.”

Retail automotive sales jumped 40.5% YoY in October 2025 — from 28.63 lakh to 40.24 lakh units

October 2025 GST collections rose 4.6% YoY to Rs1.96 lakh crore; November up 1% to Rs1.70 lakh crore

Total Diwali sales hit Rs5.4 lakh crore in goods (+25% YoY)

October 2025 saw 20.7 billion UPI transactions (+3.6% MoM), worth Rs27.28 lakh crore (+9.5% MoM)