Budget 2024 & how it will affect Retail Consumption

The Indian Union Budget, which is presented annually by the Finance Minister, plays a crucial role in shaping the country's economic and fiscal policies. The Budget 2023, which is yet to be announced, is likely to impact retail consumption patterns in India significantly. The taxes imposed on essential goods, gold, fuel, luxury goods, and tobacco are some key factors that will affect consumers' purchasing decisions. 

This article will explore how changes in taxes on these goods in the Budget 2023 could potentially impact retail consumption patterns in India.

How could taxation impact Indian retail consumption patterns?

Taxation can significantly impact the retail consumption patterns of a specific population. In India, for example, taxation can play a major role in influencing the way consumers spend their money. It is because different taxes influence spending on items differently.

There has been considerable research on how taxation affects consumer behaviour. This research has found that taxation can have a significant impact on the way consumers allocate their spending. Taxation can also change the prices that consumers are willing to spend on goods and services.

Direct taxes can lead to a decrease in the purchasing power of the consumer and shift their spending habits to focus more on needs than wants. An increase in overall GST rates would affect the consumption of goods all across the board, with discretionary spends falling in priority compared to staples and essentials. The government can also control specific spending habits by changing the GST rates of particular product segments.

Since Indian retail consumption patterns are heavily influenced by taxation, it is important to understand how taxation could impact these patterns. This article explores how different taxes could affect Indian retail consumption patterns and what implications this has for Indian retail consumers.

Although the budget has not yet been announced, a few items are likely to increase in price.

Tax on Essential Goods

Essential goods such as food, medicine, and household items are a fundamental part of daily life for most households in India. An increase in taxes on these goods can lead to a decrease in consumption, and Indian consumers would cut back on spending if taxes on essential goods increased. On the other hand, a decrease in taxes on essential goods can increase consumption as they become more affordable and gives more purchasing power to consumers.

Tax on Gold

Gold is an important asset for many households in India and a significant part of the country's economy. A change in taxes on gold can have a considerable impact on the demand for gold.

The gold price has been on the rise in recent months, and it is expected to continue to climb in the coming year. It is due to several factors, including a weaker rupee and increased demand for precious metals. The increase in gold prices will likely impact the cost of jewellery and other gold-based products.

In the upcoming Union Budget 2023 -2024, the Indian jewellery segment expects that Finance Minister Nirmala Sitaraman may lower the customs duties on gold. Currently, the customs duty on gold is around 12.5% with an additional charge of 2.5%, which has to be given as agricultural infrastructure cess. 

In the previous union budget of 2022-2023, the customs duty was increased to reduce the current account deficit. However, it resulted in a steep fall in imports of gold from 1,068 tonnes in 2021 to 706 tonnes in 2022. 

Tax on Fuel

One of the items that are expected to get costlier is fuel. The petrol and diesel price has been rising recently, and this trend may continue in the coming year. This is due to several factors, including rising global oil prices and the depreciating rupee. 

Fuel prices in India are closely tied to consumer spending, as they can affect the cost of transportation and the overall cost of living. An increase in taxes on fuel can lead to a decrease in consumption, as consumers may be less able to afford to fill their tanks.

An increase in import duty on fuels may help reduce India's dependency on fuel imports. The result could lead to increased fuel prices for the final consumer, which would inflate production costs as well, leading to widespread price hikes. This could also be the government's attempt at pushing the economy towards greener alternatives.

Tax on Luxury Goods

In addition to fuel and gold, it is also expected that taxes on luxury items will be increased in the upcoming budget. It includes luxury cars, high-end watches, and designer clothing. 
The taxes on luxury goods such as jewellery, high-end fashion, and luxury cars can impact consumer purchasing decisions, especially for high-income individuals in India. The government will likely raise taxes on these items to increase revenue and curb excessive consumption. Consumers may become less likely to consume these goods if taxes are increased on them.

Tax on Tobacco

According to the World Health Organization (WHO), raising the price of tobacco-based products through tax increases is the most effective way to discourage tobacco consumption and a government’s chance to earn higher revenues from these tobacco products. Higher tobacco prices decrease affordability, encourage quitting among users, prevent initiation among non-users and reduce the quantity consumed among continuing consumers. 

The Bottom Line

It is important to note that the budget is a complex document and will affect different aspects of the economy and society in India. It is also essential to consider other factors that can impact retail consumption patterns in India. Those, as mentioned earlier, are some of the possible effects of the budget on retail consumption patterns.