Will the third cut lift India’s consumer companies?, ETRetail

Amid rising external challenges, growth is very much on the mind of the government. The GST rate rationalisation, with four main rate slabs of 5, 12, 18 and 28% likely to give way to two slabs of 5 and 18% (with a few ‘sin’ products subject to 40%) will continue the government’s efforts to spur demand and economic activity by stimulating the economy. Most items currently under the 12% slab could attract a lower rate of 5% (including many food and household products) and those under 28% might be reduced to 18% (including cement and cars).

The cut in GST rates due to rationalisation, expected by October, will be the third such step this year aimed at boosting demand. There was a huge income-tax cut in the budget, followed by a one percentage point cut in interest rate by the RBI in a series. The third cut (in GST rates on consumer goods) will be an added push to consumer demand which has been slow to revive. FMCG firms have struggled amid high inflation and sluggish consumer income for the past 9-10 quarters, while car sales have screeched to a lower gear this year.

The consumer demand landscape

A sectorwise review of the June quarter results season so far by ET Intelligence Group reveals that demand was subdued for the majority of the sectors. Rural India continued to outpace the urban market in the June quarter with 8.4 per cent volume growth, compared to a 4.6 per cent increase in urban areas, according to the latest report from data analytics firm NielsenIQ. This is the sixth consecutive quarter when rural India has outpaced urban regions in volume growth. However, the gap is narrowing as urban areas show signs of sequential recovery.

In value terms, India’s Fast Moving Consumer Goods industry achieved a 13.9 per cent growth, driven by sustained rural demand and a steady urban recovery. “The market recorded a 6 per cent rise in volume alongside a 7.4 per cent increase in prices, with unit growth outpacing overall volume growth-signaling a stronger consumer preference for smaller packs,” stated the NielsenIQ, FMCG Quarterly Snapshot Q2’25. The urban markets are now showing a resurgence, primarily driven by smaller towns, while metropolitan areas continue to experience a decline in consumption owing to channel shift, the report added.

Hindustan Unilever (HUL), the country’s largest fast-moving consumer goods company, has said demand is recovering gradually and that it does not expect the situation to “magically change overnight”, even as it steps up investments and has lowered its margin guidance after reporting a 5% increase in revenue during the June quarter.

The overall household consumption is set to pick up in the next two-to-three quarters on rural strength, Swiss brokerage UBS Securities said in a report last month. Urban consumption will stabilise due to factors like RBI’s rate cuts, $10 billion of policy stimulus through personal income tax changes and improved availability of credit, it said. “Even as rural activity is gaining traction, we believe it is still too early to expect a broad-based recovery in household consumption, as rural consumption accounts for less than half a percentage share of the total,” its chief India economist Tanvee Gupta Jain said.Rural consumer sentiment was up, two-wheeler and tractor sales were up 9 per cent and 35 per cent on-quarter, respectively, and rural fast-moving consumer goods sales were also robust, the UBS report said. On the urban consumption front, the report said demand indicators, including passenger car sales and production of durable goods, fell sequentially in the June quarter, even as urban consumer sentiment remained stable.

Analysts at HSBC Securities estimated in June an annual boost to discretionary consumption between $30–40 billion. Lower personal taxes alone are expected to free up $12 billion in savings. If the 8th Pay Commission delivers its anticipated 15% salary hike, another $18–26 billion could land in the hands of government and defence employees. Another $3–4 billion will come from mortgage savings from falling interest rates.

Rahul Bajoria of BofA Securities had told ET in June there are growing signs that consumption indicators in India are poised to improve as policy support continues to build. Inflation remains tame, monetary easing has been front-loaded, and low commodity prices are cushioning input costs. Even though overall private consumption growth has slowed in line with GDP, Bajoria believes it will soon outpace GDP as household incomes stabilize, tax burdens decline, and credit availability improves. expects real wages, especially in rural India, to materially strengthen, thanks to low food inflation and stable income trends.

The third cut

After two major cuts this year — in income tax and interest rates — the GST rate cut on a range of consumer goods due to rate rationalisation will be an added boost in the already encouraging demand scenario. Domestic demand will get a boost after GST rationalisation, economists said, providing support to the economy amid tariff troubles. The GST cuts on items will range from durables such as refrigerators, air conditioners and cars to FMCG items and medical supplies.

Citi estimates that about 20% of items – including packaged food and beverages, apparel and hotel accommodation – fall under the 12% GST slab, accounting for 5-10% of consumption and 5-6% of GST revenue. If most of these are moved to the 5% slab and some to the 18% slab, it could lead to a revenue loss of around 500 billion rupees, or 0.15% of GDP, potentially taking the total policy stimulus for households in the current 2025-26 financial year to 0.6%-0.7% of GDP, the brokerage said.

Currently, within electronics, ACs and large-screen TVs above 32-inch screen sizes attract 28% duty. Others such as smartphones, refrigerators, small-screen TVs of 32-inches and below, washing machines, microwave ovens, and geysers are already at the 18% slab. Executives at makers of electronics and gadgets say they expect rationalisation of GST rates on ACs and large-screen TVs to 18%, which would result in at least 8-9% drop in prices.

For packaged food and daily essentials, industry executives said lower GST slabs would enhance consumption and sentiment after five quarters of sluggish sales, as urban consumers particularly, had cut back on spending, impacted by food and fuel inflation. “If the proposed lower slabs of 5% or nil are implemented for foods and daily essentials, we expect a significant increase in demand, as sentiment would be positive, particularly for entry-level packs,” a senior executive at a listed packaged food company has told ET. “Coming on the back of a good monsoon, the festive season should see a much-needed uptick in demand.”

The expected GST rate cuts will align with forecasts of demand revival in the next two quarters. Research firm NielsenIQ said in its June quarter update last week that urban recovery is gaining traction, particularly in smaller towns, adding that with inflation easing and a favourable monsoon forecast, the outlook for consumption remains optimistic.

“At a time where consumption demand has been uneven and felt pressure from high inflation and low nominal wage growth over the last couple of quarters, the proposed GST reforms are a positive, especially for essentials, aiding consumption by the lower and middle income class,” Sakshi Gupta, principal economist at HDFC Bank, has told ET. QuantEco Research economist Yuvika Singhal said, “Any kind of reduction in taxes is positive for consumption as it leaves higher disposable income in the hands of consumers.”

“With indirect taxes having a wider reach, GST reforms can deliver a stronger boost,” Gaura Sengupta, chief economist at IDFC First Bank, has told ET. “Rural consumption is improving but not broad-based enough to offset weak urban demand, so a fiscal push was needed—and these reforms provide that.”

• Published On Aug 18, 2025 at 04:54 PM IST

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