Commodity Inflation Erodes GST Rate Cut Gains for Retail
A year after GST rationalisation, rising commodity prices have eroded most consumer price benefits. While auto sales surged, FMCG and apparel sectors saw mixed results, with some prices now higher than post-GST levels.
Higher commodity prices have eroded a large part of the consumer gains from last year's GST rate rationalisation. Prices for products from food to automobiles have slowly inched up.
Automobile Sector Sees Clear Boost
The automobile sector emerged as the clearest winner from the tax changes. Consumers initially paid less, demand accelerated, and sales reached new highs. Automobile retail sales hit 29 million units in the 11 months ending August 2026, a 20% year-on-year increase according to ratings agency ICRA.
Jitin Makkar, senior vice-president at ICRA, said the reform delivered a notable consumption sentiment boost. The Society of Indian Automobile Manufacturers (Siam) also reported healthy demand in manufacturer dispatches over the last six months. Siam director general Rajesh Menon acknowledged that recent growth was supported by a lower base from the previous year.
Vehicle price changes illustrate the initial benefit and its subsequent dilution. The table below shows specific model price movements.
| Vehicle Model | Pre-GST Price (Rs lakh) | Post-GST Price (Sept 2025) | Current Price (Rs lakh) |
|---|---|---|---|
| Maruti Alto K10 STD (O) | 4.2 | 3.7 | 3.7 |
| Mahindra Scorpio-N Z2 | 13.9 | 13.2 | 13.6 |
Mixed Outcomes for FMCG
The outcome has been more mixed for fast-moving consumer goods. GST on several essentials was cut to 5% from 12% or 18%, prompting initial average price cuts of around 10%. Companies have since raised prices by 6-7% to manage higher costs for raw materials, energy, and logistics.
Mayank Shah, chief marketing officer at Parle Products, said consumers are still better off by 2-3%. He cautioned that companies may need another round of price increases closer to Diwali if input-cost inflation persists.
Nestle India stated the GST reduction provided a positive impetus to consumption. Analyst Ronak Shah of Equirus Securities offered a different view. He said it delivered more of an affordability boost than a direct demand surge for FMCG companies. "The GST reduction has provided some cushion against cost inflation, rather than translating into a meaningful increase in category consumption," he said. Premium products saw some incremental demand, but subsequent price increases diluted the gains.
Apparel and Hospitality Face Challenges
Apparel largely missed out on benefits. GST on clothing priced above Rs 2,500 rose from 12% to 18%, affecting festive and occasion wear. Rahul Mehta, chief mentor at the Clothing Manufacturers Association of India, said the GST reforms have not really impacted prices to a great degree. He expects apparel production costs to rise 8-10% this festive season, though consumer prices may increase by a lower 5-7% as the supply chain absorbs part of the burden.
Other unintended effects emerged in hospitality. Mid-market hotels moved from 12% GST with input-tax credit to 5% without it. This squeezed their margins because key inputs like food and utilities remained taxed at higher rates.
