The GST Illusion: How Price Erosion Undercuts India’s Consumption Sentiment Boost

The Goods and Services Tax (GST) rationalization in India was hailed as a major success story, with automobile sales reaching new heights and consumer goods seeing a notable consumption sentiment boost. However, this surge proved short-lived, as rising commodity prices eroded the gains made through GST rate reduction.

The automobile sector saw significant benefits from GST rationalisation, with prices dropping significantly and demand accelerating. According to ICRA’s Jitin Makkar, the changes delivered a notable consumption sentiment boost over the past 11-12 months since implementation. However, some argue that this growth was partly due to a lower base of previous year, making it easier for companies to report impressive numbers.

While data shows that automobile retail sales reached 29 million units during the 11 months ended August 2026, rising 20% from a year earlier, this figure may not be as rosy as it seems. Fast-moving consumer goods (FMCG) companies have seen a mixed outcome, with initial GST reduction providing some price relief for consumers, but rising raw-material, energy, and logistics costs forcing companies to raise prices by 6-7%.

Even then, consumers are still better off by 2-3%, according to Parle Products’ Mayank Shah. However, this is where the problem lies – while GST rationalisation may have provided a temporary boost to consumption sentiment, it has not addressed the underlying issues of cost inflation and input costs.

The apparel sector has largely missed out on the benefits of GST rationalisation, with GST on clothing priced above Rs 2,500 rising from 12% to 18%. This has taken a hit on festive and occasion wear. As Clothing Manufacturers Association of India’s Rahul Mehta pointed out, the GST 2.0 reforms or reductions have not really impacted prices to a great degree.

Some mid-market hotels have also been squeezed by GST rate changes, with those moving from 12% GST with input-tax credit to 5% without it seeing their margins shrink due to key inputs remaining taxed at higher rates.

The story of the GST illusion is complex and multifaceted. While automobile sales may be booming, consumers are being priced out elsewhere. Companies are struggling to absorb increasing costs, which ultimately translates into higher prices for consumers. Policymakers would do well to take a closer look at the long-term implications of GST rationalisation and how it affects different sectors.

The government’s focus on consumption sentiment boost may have been misplaced, especially when it comes to addressing underlying issues like cost inflation and input costs. The fact that companies are being forced to raise prices again, despite earlier price reductions, raises questions about the sustainability of these gains.

As India moves forward, policymakers must rethink their approach to GST rationalisation and ensure that benefits trickle down to consumers, not just big businesses. Only then can India truly reap the rewards of its economic growth story.