Will consumption demand remain muted despite tax cuts? Report makes big claims

A report has said that themuch-anticipated festive season may not deliver the usual consumption boost this year. It attributed the slow demand to several factors, such asweak labour markets, slowing credit, and mounting tariffs. It said these factors could weigh on consumer sentiment despite recent GST cuts.

Ambit Capital, in its latest economic insights report,said that while GST and income tax reductions are expected to cost the exchequer nearly Rs 2 lakh crore, the impact on demand is likely to be modest.

The central government has eliminated the 12 per cent and 28 per cent GST slabs and placed the items in these slabs into 5 per cent and 18 per cent GST slabs.

The report said that the consumption will be boosted because demand is driven by the income effect. Total demand increases significantly only when incomes rise and remain stable, it added.

The report claimed that there is a stagnation in the job market.

"However, widespread stagnation in formal job markets, with entry-level salaries in key sectors like IT having remained unchanged for over a decade, has limited the ability of most households to spend, regardless of the recent GST price cuts," noted the report.

It also said that13 per cent of UPI payments between April and July FY26 went toward debt repayments. Most of the UPI spending was made onnon-discretionary items, including groceries and utilities.

"Approximately 13% of UPI payments made in 4MFY26 were made to repay debt. In fact, seven of the top 10 contributors to UPI spending growth have been either related to debt repayment or non-discretionary items, such as essential spending on groceries and utilities," the brokerage said.

It said there was a slowdown in credit for retail markets.

"While this leverage fueled the post-pandemic consumption boom, rising delinquency rates and regulatory tightening have since led to a significant slowdown in credit disbursement," said the report.

It also warned of potential job losses due to the US tariffs in sectors liketextiles, leather, and gems, and jewelry.

"In the coming months, the impact of US tariffs will begin to be felt in India, leading to significant job losses, particularly in labor-intensive sectors like leather, textiles, and jewellery," added the report.

Hirings remained weak in most sectors at 7 per cent in the financial year 2025.The subdued sentiment is reflected in muted sales of high-end passenger vehicles and real estate, two key indicators of metropolitan consumption.