Will GST rate cut increase credit demand and drive consumption? Here's what experts say

The Centre timed the Goods and Services Tax (GST) rate cuts to give a fillip to the economy by driving consumption and boosting demand ahead of the festive season. But the bigger question is how much of this rate rationalisation will translate into stronger credit demand and lasting consumption?

According to experts, the GST rate cuts may induce a momentary spurt in consumption, but a sustainable pattern will only be driven by higher income levels and job security, not just lowering of taxes. 

If GST cuts are passed on, it can meaningfully lift consumption and credit growth in India, especially in the September–December “festive” quarter, said Hiten Mistry, sector lead–consumer (investment banking), Equirus Capital. "The integration of comprehensive GST reductions, coinciding with festive periods and streamlined tax slabs, is more effective than previous incremental adjustments. Therefore, the response is affirmative," he said, emphasising the execution of the GST rate cuts. 

However, Indranil Pan, chief economist at YES Bank, cautioned that private investment demand may remain muted as the economic environment remains uncertain amid U.S. President Donald Trump’s tariff tantrums. He pointed out that demand for loans for projects was not picking up. "Domestic demand may be boosted to an extent due to the GST cuts, but the benefit of the cuts will more accrue to the middle-income category, as the items that have seen a sharp reduction in GST are the items for mass consumption. On the other hand, GST drop for cars and cements may not immediately kickstart demand for cars and boost housing demand as consumers in the urban segment are seeing a negative income effect in terms of negative wealth effect, job losses, and lower wage growth," added Pan.

Rating agencies, too, noted that the surge would be short-lived, as once the initial excitement wears off, sales will normalise and households will return to their usual spending.

"The GST rate cut could act as a powerful catalyst to revive credit growth and consumption, but the linkage is indirect and the longevity of the impact is subject to other factors,” said Siddharth Maurya, founder & managing director of business investment firm Vibhavangal Anukulakara Pvt. Ltd. "Borrowing costs for households are still high and inflation won’t budge, and appetite for new loans is declining."

Besides, concerns over unsecured lending continue to weigh down on banks, contributing to the deceleration of credit growth. Economists say that the fundamental drivers of sustained consumption growth are income growth, employment stability, and lower inflation. "For sustained consumption growth, you would need GST reforms along with credit rate easing, stake control, and enhanced confidence in the financial system," added Maurya.

At the same time, economists and institutions anticipate the GST reform to lift GDP by 0.3-0.6 percentage points, with SBI projecting a boost in consumption worth ₹5.31 lakh crore, or around 1.6% of GDP. "The expected recovery in sentiment and affordability, especially ahead of Diwali, may also help nudge retail and SME credit demand, setting the stage for broader, cyclical consumption-led growth," said Prof Vishwanathan Iyer, senior associate professor and director of accreditation at Great Lakes Institute of Management, Chennai.

Will credit demand peak during the festive season?

The sustainability of this stimulus depends on several structural frameworks. Credit growth has already slowed. Overall bank credit growth fell to 9.9% in June 2025 from 15% a year ago, while industrial credit dropped to 7.6%, though personal loans remain a bright spot. With households facing sticky inflation and still relatively elevated borrowing costs, unsecured lending remains constrained, limiting how much GST relief can translate into durable demand.

According to economists, personal credit demand is weak and may pick up to some extent in the busy festive season. However, a sustained growth may not be in order as various types of uncertainties will keep spending in check.

"A big increase in the secured lending—cars and mortgages—may not be expected. Banks are also very cautious and have tightened credit evaluation standards for unsecured lending, implying that the pace of growth here may also not be very strong," said Pan.

Iyer said, "Tax cuts create an immediate spending boost, but without complementary macro support (like further monetary easing, targeted credit deepening, and income growth), the link to sustained consumption and credit expansion is likely felt only in the short run."  

BankBazaar.com CEO Adhil Shetty said the removal of GST has made some categories of vehicles more affordable, which can improve their accessibility. “But loan rates for cars or personal loans would not change, so the impact on retail lending overall may not be there. Borrowing decisions would continue to be driven by income levels, interest costs, and repayment capacity rather than tax changes," he said.