India's Tax Cuts: A Boost for Festive Spending Amid Economic Challenges

Starting Monday, the daily economic burdens of millions of Indians could ease slightly.

Staples like milk and bread, life and medical insurance and life-saving drugs will become tax-free. Consumption tax on small cars, television sets and air conditioners will drop from 28% to 18%. And other common goods like hair oil, toilet soap and shampoo will be taxed at a marginal 5% instead of 12% or 18%.

The sweeping cuts are part of Prime Minister Narendra Modi's major overhaul of India's complex goods and services tax (GST) regime announced earlier this month. This is expected to simplify the tax code and give flagging household consumption - which makes up over half of India's gross domestic product (GDP) - a much-needed fillip.

The timing couldn't be more opportune. Lower GST rates coincide with the beginning of a long festive season when Indians typically open their purse strings to buy everything from new cars to clothes.

This four-month period also brings in a bulk of yearly sales for consumer goods companies.

The hope is, reduced taxes will mitigate some of the impact of the US's bruising tariffs on India, leave people with more money to spend and spruce up the domestic economy.

The cuts come off the back of a $12bn income tax giveaway announced in February and lower interest rates from India's central bank.

Companies, including Reliance, consumer staples giant HUL, and automaker Mahindra & Mahindra will pass on lower taxes to consumers to boost demand.

Carmakers are banking on the cuts, with share prices up 6-17% since Modi's August announcement, while dealerships report rising enquiries amid unsold inventory.

At a Mumbai showroom of Hero Motocorp, a dealer expressed optimism about a 30–40% sales jump over the next two months compared to last year.

This uptick is largely driven by first-time buyers benefitting from the tax cuts and festival discounts.

However, some businesses are scrambling to adapt to the tax changes, leading to a mix of confusion and anticipation in the marketplace.

At a net level, the impact of the GST cuts is expected to have a largely positive ripple effect across consumer spending, particularly beneficial to the middle class. However, this reform may lead to significant revenue losses, as the government anticipates losing around $5.4bn this year.

As these changes unfold, the long-term implications remain uncertain—both for consumer confidence and the fiscal health of the Indian economy.