ACs to get cheaper by 10%, says industry, after GST rate cut; but will it push demand enough to benefit makers this festive season?

Finance Minister Nirmala Sitharaman has announced a GST rate cut on electronic appliances including air conditioners, lowering the rate from 28% to 18%.

Announced on Wednesday late-evening, most industry players have lauded the move, for it is expected to boost the demand.

Blue Star MD B Thiagarajan told Fortune India that the rate cut will propel phenomenal growth within the AC industry and will directly cause a reduction in prices.

“With this reduction, products that were earlier seen as aspirational are now more accessible, allowing a larger section of households to upgrade to energy-efficient and connected appliances,” says Manish Sharma, Chairman, Panasonic Life Solutions India .

Sharma anticipates that this will push demand during the upcoming festive season, given this rate cut coupled with an income tax slab revision during the Budget earlier this year will ‘boost individual disposable income and consumer sentiment.’

“Together, these reforms create a strong momentum for the consumer durables sector, driving higher demand across urban and emerging markets,” Sharma added.

A Daikin source told Fortune India that for some dealers, the sales may rise slightly by 10-20%, on account of pent-up demand, though this remains uncertain.

Will this directly benefit AC makers?

The real question, however, is whether this cut will trigger a significant surge in AC demand during a prolonged monsoon. The caveat is that the peak season for ACs has already passed, and this year demand already was muted owing to a brief summer. With heavy rains still underway, immediate consumer interest in buying ACs is likely to remain limited.

An industry source states that a customer who is aware of ACs getting cheaper from September 22, will not immediately buy ACs, instead wait for the next season.

“Even if you ask about the existing inventory, much of that has been managed, as dealers did not order following the subdued summer demand. Therefore, in the short-term, there is not going to be a drastic impact on AC sales,” they add.

The demand for ACs was 50-60% lower this year, due to early and extended monsoon, compared to last year’s boom. As a result, even if there were any 10% growth in off-season sales, which are itself limited, these would still be unable to match the summer season’s demand loss.

Further, industry sources point out that the revised rates apply only to the consumer segment, specifically room ACs. Sources claim that commercial ACs will continue to attract 28% GST, while components remain unaffected by the change. As a result, the rate cut is unlikely to create any supply-side impact in the near-term. They add that the cost of air conditioners will not go down, due to these rate cuts.

Thus, unlike other unseasonal consumer durables including televisions and washing machines, AC makers do not expect a GST rate cut to immediately boost sales. Instead, they believe it may encourage consumers to opt for more premium models closer to the next summer season, which will also hinge on the weather at that time.