Budget Analysis 2025: GST Collections Grow Slower Than GDP, Consumption Patterns Shift In India

Summary

In this discussion, industry leaders address India's consumption trends, focusing on concerns about weakening urban demand and the implications for various sectors. While consumption makes up 61% of the GDP, the panel questions whether this is due to a decrease in agriculture and manufacturing contributions. Key topics include GST collection growth, investment hesitation, corporate cash reserves, and the impact of tax policies. Suggestions like raising the tax threshold to boost consumption and revisiting tax incentives for manufacturing are explored, alongside a comparison to global policies, such as those in the U.S. under President Trump.

Takeaways

• 😀 Consumption in India is struggling, particularly at the entry-level goods segment, which comprises 60-70% of the population. FMCG CEOs are concerned about signs of weakening urban demand.
• 😀 GST collections are growing at a slower pace than the nominal GDP growth, highlighting potential issues with consumption in the economy.
• 😀 The share of consumption in India's GDP has increased to 61%, but it's unclear whether other sectors like agriculture or industry have shrunk, contributing to this rise.
• 😀 Despite robust tax collections, there's a concern that companies, sitting on large amounts of cash (₹7 lakh crores), are not investing, indicating a lack of confidence in consumption growth.
• 😀 The government is focusing on pushing individuals toward the new tax regime, which could free up more money for consumption and potentially boost GST collections.
• 😀 Tax collections are increasingly coming from individuals rather than corporations, indicating a shift in the economy and raising questions about how this will impact spending power.
• 😀 The idea of lowering tax rates for individuals earning up to ₹15 lakh has been proposed to encourage spending and stimulate consumption, which would then impact the overall economic growth.
• 😀 The question of why companies are not investing despite the high levels of idle cash and mid-70s capacity utilization remains a major point of concern.
• 😀 Capital expenditure must be ramped up, and it's been suggested that lower corporate tax rates or tax incentives for new manufacturing could encourage more investments.
• 😀 A sector-wise approach to tax incentives, based on large-scale investments and job creation, could provide a level playing field and stimulate the economy by encouraging targeted investments.

Q & A

What concern have FMCG CEOs raised during their quarterly earnings calls regarding urban demand?

FMCG CEOs have expressed concerns about urban demand weakening, particularly in low-price, entry-level goods. They believe that consumption is struggling in these segments, which make up a large portion of the population.

How does the growth of GST collections compare to India's GDP growth?

The growth of GST collections is slower than the nominal GDP growth. This discrepancy suggests that consumption may not be increasing at the same pace as the overall economy.

What is the implication of the rise in consumption as part of India's GDP?

While consumption as a percentage of GDP has increased, it raises the question of whether the relative contributions of other sectors like agriculture and industry have decreased. The data suggests that these sectors may be shrinking, though further clarification is needed.

Why are private companies sitting on large amounts of cash despite reported consumption growth?

Private companies are sitting on over ₹7 lakh crores in cash because they do not see significant investment opportunities that would yield returns. Despite the apparent growth in consumption, businesses are hesitant to invest due to uncertainties about market potential and the overall economic environment.

What role do tax collections play in India's economic situation?

Tax collections, especially through mechanisms like the Securities Transaction Tax, have been robust. However, there is a concern that the government could do more by increasing the threshold for taxation, which would leave more disposable income with consumers, potentially boosting consumption.

What suggestion does DH Kanabar offer to stimulate consumption and investment in India?

DH Kanabar suggests raising the threshold for taxation and lowering rates for individuals earning up to ₹15 lakh, which would increase disposable income and boost consumption. Additionally, he advocates for lower tax rates for new manufacturing companies to incentivize investment in the manufacturing sector.

How did the previous corporate tax cuts impact investment in India?

Despite a significant reduction in corporate taxes in recent years, the expected boost to investment did not materialize. Instead, many companies used the tax savings to clean up their balance sheets and reduce debt rather than reinvesting in expansion or increasing worker salaries.

What is the current capacity utilization rate in India, and what does it imply about the economy?

The capacity utilization rate in India has been in the mid-70s for a long time. This suggests that there is potential for further expansion, but businesses are not taking advantage of this capacity, possibly due to a lack of confidence in the market or other economic constraints.

Why does DH Kanabar suggest sector-specific tax reductions for large-scale investments?

Kanabar believes that targeted tax reductions for specific sectors, such as manufacturing, would encourage large-scale investments. For example, offering lower tax rates for companies investing over ₹10,000 crore and creating jobs could make India more attractive for manufacturing investment.

What example does DH Kanabar cite from the U.S. to support his suggestion for tax incentives in India?

Kanabar references former U.S. President Trump's policy of offering lower tax rates (15%) for companies that manufacture in the U.S. as a way to incentivize domestic production. He suggests that India could adopt a similar strategy to attract large-scale investment and support manufacturing growth.