PM Modi's tax cut fuels ₹6 lakh crore festival shopping boom in India

India’s sweeping consumption tax cut drove shoppers to splurge on items from cars to kitchenware during the month-long festival season, boosting the economy that was slammed with a 50% import levy by the US.

Spending between Sept. 22 and Oct. 21 — the period between the Hindu festivals of Navratri and Diwali — increased 8.5% from the same time last year, according to data from retail intelligence platform Bizom shared with Bloomberg News.

Sales across the country topped 6 trillion rupees ($67.6 billion), with items like jewelry, electronics, apparels, furnishing, and sweets most in demand, B. C. Bhartia, national president of Confederation of All India Traders, said in a statement.

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Improved sales reflect a turnaround in local consumption, after a nascent recovery in April was cut short by steep US tariffs. The Narendra Modi-led government responded by slashing the Goods and Services Tax from Sept. 22 for almost 400 categories of products.

Maruti Suzuki India Ltd., Tata Motors Passenger Vehicles Ltd. and Mahindra & Mahindra Ltd. — India’s largest carmakers — saw surging monthly sales, as the first major tax cut in nearly a decade made cars cheaper.

Hyundai Motor India Ltd. saw a 20% jump in sales on the Hindu festival of Dhanteras — an auspicious day for shopping big-ticket items including gold — compared with last year while Tata Motors delivered more than 100,000 cars between Navrati and Dhanteras.

Mahindra saw a 27% jump in tractor sales as the good monsoon season boosted rural incomes. This and the tax cut spurred more purchases for Mahindra.

Working Sundays

Maruti’s production team has been working Sundays to handle the surge in bookings, especially for smaller cars, Partho Banerjee, senior executive officer for marketing and sales said in a post-earnings call last week.

The demand for its entry-level models like the Alto, S-Presso, WagonR and Celerio is so strong that Maruti dealers now joke about counting helmets left behind in their showrooms by two-wheeler riders upgrading to cars, Banerjee said.

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Financial service firms, including Kotak Mahindra Bank Ltd. and SBI Cards & Payments Services Ltd. saw strong growth in spending across categories.

“We saw buoyancy in the kitchen category” during the festival shopping, with products like pressure cookers benefiting from the tax cut, Kaleeswaran A., chief financial officer at Crompton Greaves Consumer Electricals Ltd., told Bloomberg News.

To be sure, the tax changes also disrupted some Indian businesses’ supply chain and hurt sales as companies and distributors hurried to offload goods at older rates.

In some cases, buyers deferred big ticket purchases from mid-August, when Modi first announced the cut, to end of September when lower prices kicked in.

Pent—Up Demand
The sales surge should be interpreted with caution as some of it would be due to a high-than-usual pent up demand, Nomura economists Sonal Varma and Aurodeep Nandi wrote in a Oct. 27 note. A correct metric would also need “to account for data trends in the December to January period,” they wrote.

While economic headwinds have eased a bit, factors like slower income growth, weak labor market and fading wealth effect continue to weigh on sentiment and demand conditions, according to an Oct. 29 report by BofA Securities.

Still, companies are more optimistic.

Crompton’s Kaleeswaran expects the recent sales momentum to sustain through January and beyond. The maker of fans and lamps is tracking growth in real estate, wire and cable segment for signs of buoyancy in household sentiment.

“Some of these green shoots are giving us the confidence” that consumption is moving in the right direction, Kaleeswaran said.