New Delhi – recent Goods and Services Tax (GST) cuts enacted by the Modi government are poised to inject momentum into India’s festive season spending, potentially bolstering economic activity as the country heads into a crucial period of consumer demand. The reductions, impacting roughly a third of the average Indian household’s monthly expenses, aim to increase disposable income and stimulate purchases.
While the tax cuts are expected to largely benefit consumers – notably the middle class - and provide a boost to sectors like FMCG and consumer durables, they come at a meaningful fiscal cost. The government projects a revenue loss of approximately $5.4 billion this year,a figure autonomous experts like Moody’s believe could be substantially higher,exacerbating existing strains on the national budget.
According to ratings agency Crisil, the lowered taxes will positively affect a third of an average consumer’s monthly expenditure. The extent of the benefit hinges on whether producers will fully pass the rate reductions onto consumers, a process expected to unfold over the current and next financial year.
However, the cuts arrive amidst a challenging macroeconomic landscape.Federal tax revenues have experienced minimal growth in the first four months of the fiscal year, a stark contrast to the 20% increase recorded last year.Concurrently, government spending has risen by over 20%.
To maintain fiscal discipline and control the budget deficit, the Modi governance may be compelled to scale back large-scale infrastructure projects – including road and port developments – which have been key drivers of india’s economic growth over the past five years.
Despite the potential for reduced infrastructure spending, the government is hoping the tax cuts will translate into increased consumer spending. Small shopkeepers,however,have yet to fully realize the benefits,with information regarding the changes still filtering through the retail network,as noted by vishnu Vardhan in a recent report.
