India has recently announced an increase in Goods and Services Tax (GST) on apparel and footwear products from 5% to 12%, effective from 1 January 2022. At a time when India is already struggling to recover from the COVID-19 impact, any hike in GST rates will further delay the recovery of apparel sales in the country, says GlobalData, a leading data and analytics company.
Any increase in GST will eventually lead to a hike in the price of clothing and footwear as there has already been a hike in the rates of raw materials such as cotton yarn and acrylic prices over the last year.
Ankita Roy, Retail Analyst at GlobalData, comments: “An increase in GST will hit the demand as both consumers and retailers are already facing inflationary pressures. Small-scale retailers with limited capacity and margins will end up pricing their goods at higher rates, thus losing a share of consumers with value preference.
“Although India has a growing middle-class population with a higher disposable income, consumers’ propensity to spend on discretionary items has decreased post the pandemic. The rate hike, if not monitored, might slowdown the apparel market recovery post-pandemic.”
According to GlobalData, despite the recovery of apparel sales in 2021 by 16.1%, it will remain short of achieving its 2019 level by INR321bn (US$7.1bn). However, this gap may widen following the implementation of GST in 2022.
With high unemployment rates and financial uncertainties, higher costs of these products may pose an additional burden on both retailers and consumers due to dampened demand and limited budget, respectively.
Roy concludes: “Established retailers can cover this cost to a certain extent given their large-scale of operations. However, the situation will worsen for small-scale retailers due to costly raw material imports and GST hike leading to an increase in the overall price of the product. While it is too soon to gauge the intensity of the impact of the GST hike on apparel and footwear sales, some impact can be expected by widespread vaccination drive, eased travel restrictions, and employees getting back to offices.”