GST cut on room air-conditioners will ease prices but new star label implementation adds cost

Mumbai: While the recent reduction in goods and services tax (GST) on room air-conditioners (RACs) under two tonnes is expected to lower retail prices, the upcoming implementation of the new Star Label from January 2026 will likely push them back up. According to ICRA, the GST rate cut from 28% to 18%, effective 22 September 2025, could reduce prices by ₹2,000–₹3,000 per unit. However, the new energy efficiency standards under the revised Star Label are projected to increase prices by ₹500–₹2,500 per unit, depending on the model.

The timing of these regulatory changes is expected to influence consumer behaviour in the coming months. ICRA anticipates a wave of pre-buying in the third quarter of FY2026, as consumers seek to take advantage of lower prices before the new label takes effect. This may offer some relief to manufacturers, who are currently grappling with a sharp drop in demand and a significant build-up in inventory.

Sales volumes in the RAC industry are forecast to decline by 10–15% year-on-year in FY2026, falling to 11.0–11.5 million units from a record 12.5–13.0 million units in FY2025. The downturn has been attributed to unseasonal and above-average rainfall during the peak summer months of April to July 2025, particularly in North and Central India. The extended wet spell reduced the number of heatwave days, leading to a 15–20% drop in sales during that period.

As a result, channel inventory has doubled to around 2.5 million units as of July 2025, placing pressure on original equipment manufacturers (OEMs) to clear stock. A partial recovery is expected in the second half of FY2026, especially in Southern and Western regions, where forecasts point to a warmer summer in 2026.

The RAC industry is also preparing for broader regulatory changes beyond the Star Label. The phased implementation of the Quality Control Order (QCO) over the next 12 months will require compliance with Indian Standards and mandate the Bureau of Indian Standards (BIS) quality mark on products. This move is expected to increase indigenisation and reshape manufacturing strategies.

Currently, 65–70% of India’s RAC manufacturing capacity is held by OEMs, with the remaining 30–35% concentrated among contract manufacturers. Nearly 80% of total capacity is controlled by the top seven OEMs, while contract manufacturing is limited to three or four major players. To meet growing domestic demand and adapt to regulatory shifts, manufacturers have announced capital expenditure plans of ₹4,500–₹5,000 crore over the next two to three years. This investment is expected to increase total capacity by 40–50% from the current 24–26 million units.

The Government of India’s production-linked incentive (PLI) scheme for components manufacturing in the consumer durables sector is also playing a role in boosting localisation. ICRA estimates that indigenisation in the RAC industry will rise to 70–75% by FY2028, up from the current 50–60%, as companies pursue backward integration and respond to policy incentives.

Despite the short-term challenges posed by weather variability and regulatory transitions, the long-term outlook for the RAC industry remains positive. Rising temperatures, low household penetration, urbanisation and growing replacement demand for energy-efficient models continue to support structural growth.