By M Muneer, Fortune-500 advisor, start-up investor and Co-founder, Medici Institute for Innovation X: @MuneerMuh
India’s latest goods and services tax (GST) cuts arrived with the FM waving a fiscal wand to make wallets open and consumption bloom. The government’s new playbook reads like a cheerful fable: trim taxes, and citizens will splurge, and factories will hum long enough, and GDP will sing. The logic is impeccable—on paper.
Beneath this appealing narrative lies a deeper structural risk. A growth strategy powered primarily by consumption rather than investment, productivity, or exports risks exhausting itself long before Viksit Bharat goals. In its eagerness to celebrate a “consumption boom”, India may be undermining the very foundations of sustainable growth.
Over 60% of India’s GDP already comes from private consumption, compared to less than 40% in China during its high-growth decades. The GST reductions have lowered the tax burden, and the retail data from the festive season has shown a surge in sales, which the government touts as proof that the policy is working. But the critical question is not whether we are buying more, but if we are producing more of what we buy.
The answer, alarmingly, points the other way. India’s merchandise trade deficit for April-September FY26 exceeded $154 billion, with $54 billion of that imbalance coming from China. This indicates much of the new consumer demand is being met by imports, not domestic manufacturing. In other words, our celebrated consumption boom may be enriching our trading partners rather than our producers.
History points to caution. The Bank for International Settlements found that consumption-led expansions tend to be shallow and short-lived in comparison to investment- and export-led growth. Yes, consumption increases demand today and is—with elections around the corner—a favourite strategy for the ruling party, but doesn’t build the capacity for production tomorrow. When growth depends too much on consumption, imports increase, investment slows, productivity tanks, and fiscal balance deteriorates.
The post-2010 China experience is instructive. As they sought to “rebalance” toward domestic consumption, investment growth slowed and productivity decelerated. While household spending provided short-term stability, the economy struggled to sustain its earlier dynamism. Even for a manufacturing behemoth, consumption-led growth cannot substitute for continuous investment in productive capacity. For us, with lagging manufacturing and increasing dependency on imports, the risks are far greater.
GST cuts lead to lower government revenues, which means fewer funds for infrastructure, education, and R&D, all critical for the Viksit Bharat goals of 2047. It is highly uncertain in today’s tariff-ridden geopolitics whether sharp acceleration of the economy will happen to offset the revenue loss. In such a scenario, fiscal deficit will impact transformative initiatives.
The real risk is structural, not economic. A consumption-driven model tempts firms to chase easy demand instead of investing in innovation and long-term competitiveness. When spending surges, they will resort to importing rather than building capacity, feeding a loop of rising imports, weak investment, and shrinking productivity—an early version of the middle-income trap.
Proponents of consumption-first growth say India’s vast middle-class market is its ace card in a protectionist world—a blunder many MNCs had believed in years ago. Some economists claim that booming domestic demand will “power India’s manufacturing future”. It’s a comforting narrative, but not yet borne out by data. Manufacturing still struggles with deep-rooted bottlenecks, including tangled supply chains, skill gaps, and regulatory drag. Without structural reform, consumption will enrich importers, not producers, while inflation quietly erodes the gains.
The much-publicised “Make-in-India” dreams require more than buoyant domestic demand. China and South Korea didn’t rely on domestic consumption. What’s needed is confidence in the market for institutional investments, innovation ecosystems, and global competitiveness. Essentially, stable taxation, solid supply chain infrastructure, affordable credit, energy reliability, skilled labour, and predictable regulation. A temporary consumption boom does little to build these.
Now comes the generational dimension. The famed demographic dividend of a youthful workforce will yield returns only if new, productive jobs are created in manufacturing and technology, not in inhumane q-com delivery. A consumption-centric economy tends to create employment in retail and services which are low in productivity. Without a manufacturing surge, the demographic dividend could quickly turn into a demographic liability, with millions stuck in low-wage, high-risk work.
Economies that relied on consumption without matching investment have seen diminishing returns. Many oil-rich Gulf countries discovered that using public wealth to fuel consumption rather than diversification left them exposed to shocks when oil prices fell. Only when they began channelling resources into manufacturing, logistics, and knowledge industries did their growth stabilise. The government, at this juncture, must heed that lesson.
To be clear, consumption is vital to economic dynamism; no economy grows with austerity alone. But it must be the result of productivity gains and investment, not their substitute. The government’s instinct to boost demand is understandable, especially in a global slowdown. But without infrastructure investment, industrial policy, and value-chain integration, it is highly unlikely that India’s structural ascent will not be stalled.
The smarter path is not to abandon consumption stimulus but to anchor it in supply-side strategy. GST cuts should be targeted toward sectors where domestic manufacturing can scale: textiles, auto components, renewable energy equipment, and consumer electronics under production-linked incentive schemes. Every rupee of foregone tax should be seen as an investment in domestic value addition.
We have a narrow window of opportunity. Global supply chains are realigning away from China; new technologies are reshaping manufacturing; and its young workforce is poised to drive productivity for decades. Squandering this moment on a consumption sugar high would be a strategic mishap. The test of policy wisdom lies in how much more productive the nation becomes in the years ahead, not in how much Indians consume.
India’s growth story can’t run on shopping carts and 10-minute deliveries. It must run on factories, skills, and ideas—the true engines of progress. Consumption can dazzle for a season, but production endures. A GST cut may thrill the media, but if it doesn’t empower producers it’s like painting a rusting car and calling it new. The true test of policy wisdom isn’t how much India buys, but how much it builds.
