Festive Cheer Fades: Why Tax Cuts Fail to Boost Consumer Spending

In its latest economic insights report, Ambit Capital 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.

It says tax cuts may not lead to a significant consumption boost, "Consumption demand is primarily driven by the income effect, meaning that total demand increases significantly only when incomes rise and remain stable. 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.

Adding to concerns, the report noted that UPI transactions show that nearly 13 per cent of UPI payments between April and July FY26 went toward debt repayments.

"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, adding that high fixed household costs leave consumers with little room for discretionary purchases.

The report also flagged a slowdown in retail credit, which had been a major driver of post-pandemic consumption. With banks and NBFCs turning cautious amid rising delinquency rates, the share of new-to-credit customers in personal loans has fallen sharply. "While this leverage fueled the postpandemic consumption boom, rising delinquency rates and regulatory tightening have since led to a significant slowdown in credit disbursement," said the report.

Compounding the headwinds, US tariffs on Indian exports, especially in labour-intensive sectors like textiles, leather, and gems & jewellery, are "now being added to the unholy mix". The brokerage warned of potential job losses in these industries, which together employ millions. "In the coming months, the impact of US tariffs will begin to be felt in India, leading to significant job losses, particularly in labour-intensive sectors like leather, textiles, and jewellery", added the report

The labour market in metros is already under strain, with wage growth slowing to 7 per cent in FY25 and hiring remaining weak across most sectors. The subdued sentiment is reflected in muted sales of high-end passenger vehicles and real estate, two key indicators of metropolitan consumption.

However, the report found pockets of resilience in smaller towns. Tier-II and tier-III cities are witnessing strong job creation and wage growth, supported by the expansion of global capability centres (GCCs) and e-commerce activity. Amazon and Flipkart data show that sales volumes in these cities are growing up to four times faster than in metros.

Rural India also offers a bright spot. With employment rates hitting post-pandemic highs and rising real wages, rural households are better positioned to spend during the festive season. "Stronger rural labour markets will support consumption, especially for two-wheelers and FMCG goods," noted the report.

Still, as urban consumption remains weak, manufacturers are treading cautiously. Industrial production data show no significant ramp-up in festive output, with non-durable goods, particularly food products, recording a year-on-year contraction.

The report concludes that while festive cheer will return to smaller cities and villages, the broader consumption recovery will likely remain uneven and fragile.

- ANI