India's Festive Economy Boosted by Modi's Tax Cuts

Fri Sep 26 2025 11:24:50 GMT+0300 (Eastern European Summer Time)

Prime Minister Narendra Modi's significant tax reforms are set to alleviate financial burdens for many Indians, coinciding with the festive season and aiming to enhance consumer spending.

In a bid to invigorate India's economy, Prime Minister Narendra Modi has announced sweeping cuts to the Goods and Services Tax (GST) that will eliminate taxes on essential goods and reduce rates on consumer products. This reform comes at a crucial time as the festive season approaches, traditionally characterized by heightened consumer spending. While the tax cuts are expected to boost household consumption, concerns linger about the potential revenue losses for the government and the impact on smaller businesses.

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%. 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 both 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 purses to buy everything from new cars to clothes. This four-month period also brings in a bulk of yearly sales for consumer goods companies, such as packaged food makers and apparel manufacturers.

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 announcement, while dealerships report rising inquiries amid unsold inventory.

The cuts come off the back of a $12bn income tax giveaway announced in February and lower interest rates from India's central bank, which bode well for a consumption pick-up. At a Mumbai showroom of Hero Motocorp, India's largest motorbike manufacturer, dealerships expect sales to jump 30%–40% over the next two months compared to last year.

Nonetheless, news of the tax changes is slow to reach smaller brands and shopkeepers, who may lack the capacity to adjust pricing and packaging on short notice. This is especially true in areas like Mumbai's Crawford Market, where many vendors are unaware of the changes. The government's adjustments have raised concerns that changes in tax slabs could negatively impact some segments, particularly in high-value markets like wedding attire.

Despite these challenges, overall, the impact of the GST cuts is expected to be positive, particularly as it may enhance purchasing power among the middle class, according to ratings agency Crisil.

However, the government anticipates a revenue loss of around $5.4bn this year due to the tax cuts, which could lead to challenges in maintaining spending on infrastructure and public services in the near future.