The recent rationalisation of GST into just two slabs has been greeted with exuberant claims that it will lower prices, spur demand, and unleash a wave of growth. Since private consumption accounts for more than 60% of India's GDP, the argument runs, cheaper goods and services will translate into higher spending and a powerful economic multiplier. It is an attractive story—but one built more on wishful thinking than on India's socio-economic reality.
Let me start with well-known basics.
Consumption in India is deeply unequal.
According to the Household Consumption Expenditure Survey (2023–24), the bottom 5% of Indians consume only around ₹1,677 per month per person in the villages, while the consumption is ₹2,376 per month per person in cities. Meanwhile, the top 5% in villages and cities spent around ₹10,137 and ₹20,310, respectively on consumption every month. That's a more than tenfold difference.
Just as important is the composition of this consumption.
According to recent surveys, the poor spend 60–65% of their meagre budgets on food staples—most of which are exempt or taxed minimally under GST. The upper quintiles, on the other hand, spend heavily on goods and services that attract GST: packaged foods, appliances, personal care products, travel, entertainment, restaurants, digital services.
This immediately punctures the balloon of the latest cuts fuelling a"GST-led consumption growth".
A rate cut on shampoo or smartphones may matter to a middle-class household, but it means little to a daily wage earner whose primary concern is whether there will be enough rice and fish for the family. So, none of them are going to be logging in or queueing up to buy these goods in the numbers needed to boost growth.
Simply put, such price reductions only translate into higher consumption if households have the disposable income to take advantage of them. For the bottom half of India, the binding constraint is income, not price. Their demand is rationed by poverty, not by GST.
The boosterism around GST 2.0 also assumes that demand is equally price elastic across the spectrum of Indian consumers. It is not.
For the affluent, demand is relatively responsive to changes in price. For the poor, who operate with razor-thin margins of survival, it is close to inelastic. As a result, the bulk of the benefit from GST rationalisation will accrue to those already consuming more. The economy-wide impact will therefore be much smaller than the headline optimism suggests.
This is not to deny that GST rationalisation has merits.
Simpler tax structures reduce compliance costs for businesses, close loopholes, and may help formalisation. Middle-class households may feel some relief. But it is a leap of faith to imagine that these changes will suddenly empower most Indians or become a powerful driver of national growth.
If policymakers are serious about broad-based consumption-led growth, the levers lie elsewhere.
Raising rural wages, expanding employment guarantees, strengthening social security, and improving public provisioning of health and education will do far more to boost effective demand. Direct transfers into the hands of the poor and working classes are far more potent multipliers than shaving a few percentage points off GST rates on consumer durables.
India's growth challenge is not that GST is too complex. It is that too many Indians still lack the income to consume. Unless this underlying inequality is addressed, the promise that GST 2.0 will unleash a consumption boom is less economics than wishful thinking.
(Views are personal. John Kurien is a former Professor, Centre for Development Studies, Trivandrum.)