The Indian economy is poised to receive a significant boost, with ₹2 lakh crore expected to land in the hands of Indian consumers following recent GST cuts. This move by the government, effective September 22, 2025, aims to stimulate demand and accelerate economic growth. Finance Minister Nirmala Sitharaman has stated that these tax reforms will provide substantial relief to both consumers and businesses at a time when household budgets are feeling the pressure.

GST Revisions and Increased Disposable Income

The GST Council has been actively revamping the Goods and Services Tax structure, resulting in a streamlined system with fewer tax slabs. Many goods previously taxed at 12% now fall under the 5% GST slab, directly benefiting the middle class and lower-income segments of the population. Essential food and grocery items will be taxed at a lower rate, and some items like bread, milk, and paneer will be exempt from GST altogether. These changes are intended to reduce the tax burden on consumers, improve liquidity in the economy and increase discretionary spending.

Impact on Consumer Spending and Savings

The increased cash in hand is expected to have a multiplier effect. Households will experience reduced prices on essential goods and services, leading to increased purchasing power. Small businesses are likely to see higher demand as consumer spending rises and corporate India could benefit from stronger market sentiment and consumption-led growth. Economists believe this tax relief will add fresh momentum to India's economic growth, supporting the goal of becoming a $5 trillion economy in the near future.

However, it's important to consider the broader context of household savings and liabilities in India. While this influx of cash is a positive development, household savings have been on a declining trend in recent years. A recent report by CareEdge Ratings indicated that household savings dropped for the third consecutive year to 18.1% of GDP in FY24. Gross financial liabilities of households have also surged, nearly doubling in the last decade, reaching 6.2% of GDP in FY24. This suggests a growing reliance on credit to meet consumption needs.

Consumer Confidence and Future Expectations

Despite the decline in savings, recent surveys indicate stable to improving consumer confidence. The Reserve Bank of India's (RBI) May 2025 survey revealed that urban consumers maintain stable sentiments about the current economic situation, with brightened expectations for the future. The Future Expectations Index (FEI) rose to 123.4, reflecting optimism about the economic outlook, employment prospects, income levels, and spending capacity. Households also anticipate a decline in both price and inflationary pressures over the coming year.

Potential Benefits and Challenges

The ₹2 lakh crore influx could stimulate demand across various sectors. The festive season in 2025 is expected to see a surge in spending, with fashion and apparel emerging as key beneficiaries, second only to electronics and home appliances. A recent report indicates that 72% of urban consumers intend to increase their festive spending this year.

However, it's crucial to channelize the increased disposable income effectively. Declining interest rates on traditional savings instruments have made them less appealing, leading some households to explore riskier investment avenues like equities and mutual funds. There is need to encourage sustainable savings habits and promote financial literacy, especially among low-income households.

Government Initiatives and Long-Term Growth

The government's proactive measures, including increased public capital expenditure, are expected to support the investment scenario in the economy. The Centre has earmarked ₹11.21 trillion for capital expenditure in FY26, a 10% increase over the previous fiscal. These investments in infrastructure and other key sectors can further boost economic growth and create employment opportunities.

Overall, the ₹2 lakh crore cash in hand represents a significant opportunity for the Indian economy. By stimulating demand, boosting consumer confidence, and supporting key sectors, this move has the potential to drive economic growth and improve the financial well-being of Indian households. However, it's important to address the challenges related to declining household savings and promote responsible financial behavior to ensure long-term sustainable growth.