Consumer Tax Cuts: A Potential Lure for Global Funds to Reconsider India

India's policy mix is becoming more investor-friendly with tax cuts and lower interest rates. This could attract global funds to return to the country. However, stagnant wages and a squeeze on household demand could limit the impact of these policies. Hospital stocks were mixed in response to the tax break on health insurance premiums, as many names have already surged this year. Analysts have made positive ratings for Hexaware Tech, Eureka Forbes, and MakeMyTrip.

India's recent policy announcements, including tax cuts and lower interest rates, are aimed at boosting domestic demand and attracting global funds. The Goods and Services Tax (GST) Council has introduced a new tax structure with two main rates of 5% and 18%, along with a 40% rate for luxury goods. This simplification is expected to ease household budgets and stimulate consumption [1].

The tax cuts will have a significant impact on various sectors. For instance, carmakers like Maruti and Toyota are set to benefit immediately, while consumer goods firms such as Hindustan Unilever and Nestle will see a boost in sales [1]. The GST on daily items like packaged food and medicines will be reduced to 5% from 12-18%, which is expected to lower costs for farmers and consumers alike [1].

The tax cuts are also expected to boost sales during the festival season, which typically runs from the last week of September until November. The government has cut taxes on items such as cars, TVs, and even cement, which could lead to increased consumer spending [1].

However, the tax cuts are not without their drawbacks. The government estimates that the cuts will cause a revenue loss of 480 billion rupees ($5.5 billion), which is significantly lower than the estimates from economists [1]. Additionally, the tax cuts may not have a substantial impact on inflation, as Citi estimates that India's inflation could ease by as much as 1.1 percentage points if the cuts are fully passed through to consumers [1].

The tax cuts on health and life insurance premiums are also expected to make insurance more affordable. The GST Council has decided to exempt health and life insurance premiums from the levy of GST, which could reduce premiums by around 15% [2]. However, the government could face a revenue shortfall of $1.2–1.4 billion annually due to the exemption [2].

While the tax cuts and lower interest rates are aimed at boosting the economy, stagnant wages and a squeeze on household demand could limit their impact. Additionally, the tax cuts on luxury goods and the increase in GST on apparel and clothing accessories could hurt certain sectors [1].

In conclusion, India's policy mix is becoming more investor-friendly, but the impact of these policies remains to be seen. The tax cuts and lower interest rates could attract global funds to return to the country, but the effectiveness of these policies will depend on various factors, including the ability of consumers to spend and the response of the global economy.

References:
[1] https://www.ndtv.com/india-news/tax-cuts-sales-boost-everything-you-need-to-know-about-new-gst-rates-9214848
[2] https://www.moneycontrol.com/news/business/health-and-life-insurance-to-get-cheaper-from-sept-22-as-gst-council-scraps-18-tax-13518206.html