 "GST reforms: A demand-side push to sail India’s ship amid global headwinds")
Tax reforms in developing economies are too often examined solely in terms of their fiscal impact. Yet public finance literature, from Keynes’s General Theory to Musgrave’s ‘functional branches of government’, reminds us that taxation alters demand structures as much as it generates revenue.
The recent rationalisation of India’s Goods and Services Tax (GST), approved at the 56th Council meeting, is therefore best understood as a demand-side intervention.
Reductions in rates on essentials, rationalisation of household consumption baskets, exemptions in health and insurance, and correction of inverted duty structures collectively increase disposable incomes and stimulate aggregate demand.
Indirect taxes are regressive because they extract a larger proportion of income from poorer and middle-income households that devote most earnings to consumption.
When rates on soaps, shampoos, toothpaste, bicycles, and kitchenware were lowered from 12 or 18 per cent to 5 per cent, the effective purchasing power of these households improved immediately.
Keynesian demand theory predicts that such groups, with high marginal propensities to consume, will spend the additional resources rather than save them. The impact is magnified during the festival season, when the elasticity of demand for fast-moving consumer goods (FMCG) products is particularly high.
Industry analysts project price reductions of 8–10 per cent across brands and stock-keeping units, a change expected to lift FMCG growth by 2–3 percentage points in an industry already valued at ₹6.5 lakh crore.
Staple goods such as (ultra-high temperature-treated) UHT milk, paneer, and Indian breads have shifted from 5 per cent to nil, eliminating regressive burdens on food. The distributive rationale echoes Musgrave’s emphasis on equity in tax design. Empirical evidence from India shows that rural households drive demand when staple prices fall.
Impact Shorts
More ShortsThe All India Consumer Products Distributors Federation estimates an 8–10 per cent increase in rural consumption over the next two quarters, coupled with improved distributor liquidity of ₹4,000–5,000 crore due to lower working capital requirements.
These numbers reflect the Keynesian multiplier in practice: reductions in regressive taxation translate into broader consumption surges across the economy.
Aspirational goods such as televisions, dishwashers, and small cars were reduced from 28 per cent to 18 per cent. Price-sensitive middle-class consumers respond strongly to such changes, particularly where durable goods are involved. The elasticity of demand for aspirational durables is higher than for necessities, and reductions in effective prices trigger disproportionate expansions in volume.
Keynesian consumption functions identify precisely this sensitivity to real disposable income. In addition, behavioural economics suggests that expectations of stable prices, reinforced by GST Council consensus, encourage households to bring forward purchases rather than defer them.
Life and health insurance were previously taxed at 18 per cent, imposing an indirect levy on risk mitigation. Exemptions for all individual policies, including family floater and senior citizen plans, reduce future uncertainty costs. According to the life-cycle hypothesis, households smooth consumption over time and adjust savings in response to risk.
Lower insurance costs reduce precautionary savings and raise present consumption. This demand stimulus is less visible than cheaper soap or milk, but its long-term macroeconomic effect is equally important. Greater penetration of insurance enhances financial resilience, reduces vulnerability to health shocks, and indirectly stabilises demand trajectories.
Distortions from inverted duty structures also suppressed demand indirectly. Textiles, where inputs such as man-made fibre were taxed at 18 per cent and yarn at 12 per cent while fabric carried a 5 per cent levy, suffered from liquidity blockages. Fertiliser production was similarly affected by inputs taxed at 18 per cent against final products at 5 per cent.
Tax incidence theory explains that producer-level distortions eventually raise consumer prices, even when statutory liability rests upstream. The GST Council corrected these anomalies by aligning fibre, yarn, and fertiliser inputs to 5 per cent, reducing cement to 18 per cent, and lowering rates on agricultural machinery and renewable energy devices to 5 per cent. Neutrality in taxation ensures that consumer prices reflect underlying production costs rather than fiscal anomalies, thereby stimulating demand in downstream markets.
The fiscal arithmetic suggests a notional revenue impact of ₹48,000 crore based on 2023–24 consumption data. Yet the Revenue Secretary’s insistence on describing this as a “net revenue implication” reflects an understanding of dynamic effects. Compliance in GSTR-3B filings has improved from 85–90 per cent to nearly 97 per cent as rates have been rationalised. Higher compliance and wider consumption enlarge the tax base.
Tax buoyancy ensures that static revenue loss estimates underestimate the real outcome. The Keynesian argument for multipliers and the Musgravian framework for stabilisation converge here: fiscal sacrifice at the margin produces a broader and more sustainable revenue pool through expansion in demand.
Institutional reforms add credibility. The operationalisation of the Goods and Services Tax Appellate Tribunal (GSTAT) by December 2025 strengthens dispute resolution and creates consistency in advance rulings. When firms anticipate predictable adjudication, they are more likely to pass tax reductions on to consumers in the form of lower prices rather than retaining them as buffers against legal uncertainty. Institutional trust thus amplifies the demand stimulus by improving transmission from statutory rate cuts to actual household budgets.
Timing further enhances impact. The reforms take effect on September 22, 2025, coinciding with peak festive season demand. FMCG companies are preparing to implement new prices immediately, with expectations of higher grammage and reduced prices for sachets and popular packs. Rural India, which has already driven six consecutive quarters of FMCG growth, is projected to accelerate further under the new rate regime. The festival-season alignment reinforces Keynes’s insight that the psychology of spending is as important as the arithmetic of income.
In theoretical terms, the reforms represent an integrated application of optimal taxation, incidence analysis, and Keynesian demand management. In practical terms, they reduce household costs, stimulate rural and urban demand, enhance financial resilience through insurance, and correct distortions that previously raised consumer prices. The distributive orientation ensures that relief is concentrated among groups with the highest marginal propensity to consume, while institutional improvements secure transmission of benefits.
The author (X: @adityasinha004) writes on macroeconomic and geopolitical issues. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.
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