Arun Kumar
The demand will shift further from the unorganised to the organised sector. This, will accelerate the decline of the unorganised sector leading to loss of employment and incomes and decline in demand.
In this image received on Sept. 21, 2025, Prime Minister Narendra Modi addresses the nation on the eve of Navratri, the day from when the GST rate cuts will kick in. Photo: PMO via PTI
Recently, Prime Minister Narendra Modi hailed the goods and services tax (GST) rate cuts and a few changes in the rules regarding GST as “next generation reform” and characterised it as ‘bachat utsav’. He called it a step towards ‘Atmanirbharta’.
The context of the announcement of the GST rate cut on August 15 and its quick approval in the GST council on September 3 needs to be understood.PlayNextMute
Context of GST rate cuts
The rate cuts followed US President Donald Trump’s announced imposition of penal tariffs on India, threatening almost half of India’s exports to the US – amounting to almost Rs. 4.4 lakh crore. India’s trade deficit would rise sharply and foreign exchange reserves would decline thereby weakening the Rupee compared to the Dollar.
This would increase inflation though it may help increase exports marginally. Establishing new markets takes time and other nations impacted by tariffs are also looking for markets. Actually, given the ongoing global trade disturbances, exports to other markets may be adversely impacted.
If exports get impacted majorly, the economy will slow down. Since the private sector investments are weak, consumption has to be encouraged. The Indian government is hoping that GST rate cuts would do that by decreasing prices and spurring demand. This is also the context of Atmanirbharta which could encourage greater indigenous production and increased demand.
How much of bachat?
It is claimed that prices of items of day to day consumption will decline sharply so that families will spend less on them. This saving is characterised as the ‘bachat utsav (saving festival)’. The net revenue loss estimated by the government on the basis of 2023-24 data is Rs.48,000 crore – that is the extent of the less tax that consumers will pay.
This would be Rs. 331 per annum per person or 0.23% of their consumption. Even if the increase in tax revenue on certain items is not counted, the gross figure of tax saving may be thrice this amount in a full year or 0.7%. How much of an ‘utsav’ would this be? And that too if the entire GST reduction is passed on to the consumers.
Past experience has been that businesses absorb tax cuts in their profit margins. Even if to begin with the tax cut is passed on to the consumers, a few months down the line, this may be reversed. Immediately, due to the festivals the sales are likely to boom. Further, in August-September purchases were postponed in the expectation of drop in prices, especially of the big ticket items like, cars, TV and refrigerators.
So, sales of such items would rise sharply. One would have to wait a few months to see the real impact on consumption.
Also, the reduction in tax collection is not the same as the drop in prices. Take the case of cars where GST is reduced from 28% to 18%. A car costing Rs 100 would earlier have sold at Rs.128 and will now sell at Rs.118 – a drop in price of 7.8%.
The government’s revenue on sale of cars would drop by 35.7%. So, sales of cars would have to increase by 55.5% for the government to collect what it had collected earlier. This is most unlikely and the government’s revenues will fall.
If the revenues fall, the deficit of the Union government and the states will rise. If the government maintains the deficit at the budgeted level, expenditures will have to be cut. Since the states do most of the social sector expenditures which provides support to the marginalized, any cuts by the states would impact them. This would nullify the savings of households due to the GST cuts. Further, Modi’s claim that the states will benefit will prove to be incorrect.
Whose savings?
Cars, refrigerators, etc., are not bought by the marginalised sections. So, they get no benefit from reduction of prices of these luxury goods.
They mostly buy the cheaper unorganised sector products. Like, they do not buy the packaged roti, pizza bread or parantha of the organised sector where the GST rate has dropped to zero. If they at all buy roti, it will be from a dhaba where the GST rate cut will have no impact.
The point is that the unorganised sector producers are largely outside the GST net. As a result, they will get no benefit of the reduced GST rates. Nor will those buying their produce. The benefit of the GST cut will accrue to those buying from the organised sector, largely the well-off sections and lower middle class people.
Worse, as the price differential between the product of the organised and unorganised sector narrows, some consumers of the unorganised sector will shift to buying the organised sector packaged product. Crowds at the ‘shani bazar’ and the Sunday market will become thinner.
The demand will shift further from the unorganised to the organised sector. This has been happening since demonetisation and faulty GST.
This, will accelerate the decline of the unorganised sector leading to loss of employment and incomes and decline in demand. The PM’s neo-middle class remains poor since an increase in income even by a few hundred rupees above the poverty line does not bring them anywhere close to the middle class.
Further since the unorganised sector is concentrated in the backward states, they have been losing out in spite of GST being a last point tax. This process will accentuate.
Conclusion
The GST rate cut decision was a panic response to Trump’s announcement. Just like demonetisation and implementation of GST were not thought through, neither is the present decision of cutting GST rates. It will benefit the organised sector and the well-off but be counterproductive overall. Reform required a total overhaul of GST to remove the disadvantage of the unorganised sector, as this author has been suggesting.
Arun Kumar is a retired professor of economics at JNU, is the author of a book on GST titled Ground Scorching Tax (2019).
The article was first published in The Wire as Just Like Demonetisation, the GST Rate Cut Too Hasn’t Been Thought Through on September 24, 2025
Disclaimer: All views expressed in the article belong to the author and not necessarily to the organisation.
Read More at IMPRI:
Sign Language Accessibility for e-Governance Services, 2025
India-South Korea: Bilateral Tech Start-up Incubators
Acknowledgment: This article was posted by Urvashi Singhal, a Visiting Researcher at IMPRI.
