Apparel retailers, hit by rising cotton yarn and acrylic prices, said the upcoming hike in the goods and services tax (GST) on clothes and footwear could dampen demand.

The government recently notified an increase in GST on these products from 5% to 12%, effective 1 January.

Several apparel makers and retailers Mint spoke to said they are already facing inflationary headwinds across a range of raw materials as well as shipping. For instance, cotton yarn prices have increased in the past 12 months, they said. This has prompted retailers to revise prices or consider a revision. Now, a 7% jump in GST is set to make clothing dearer.

Ludhiana-based apparel retailer Madame said it could hike prices by 10-11% starting February and March.

We are increasing prices a little bit to accommodate both the increase of GST and raw material prices. They won't be too high because consumers won't be able to take it," said Akhil Jain, executive director, Madame.

Jain said the costs of cotton yarn and freight have gone up, making imports from China pricier. The company is dealing with a 30% jump in overall raw material costs.

Cotton yarn rates are "dangerously high", said Lalit Agarwal, managing director of value retailer V-Mart Retail. As a result, the cost of apparel for manufactures is up almost 20%. With an additional 7% jump in GST, the end product is set to get even more expensive, he added.

"We have not seen this kind of price rise in two decades. Our customer base is primarily lower-middle class—their budgets are very limited. They may either consume less or look forward to lower-priced products," he said.

The shift, however, may be temporary, he added.

This bad news came when apparel brands were reporting a recovery in demand. The festive season, weddings, reopening of offices and increased mobility have prompted shoppers to step out and refresh their wardrobes.

The GST Council's notification came as a "blow", the Retailers Association of India (RAI) had said last month. The industry association expressed concern over the impact of the hike on the already ailing apparel retail businesses.

"The 7 percentage point hike has been proposed to address the issue of inverted duty structure in the textile industry faced by a small segment of the total textile value chain. However, such a steep increase in the GST rate will adversely impact 85% of the industry, while trying to ease the problem faced by not more than 15% of the industry," it added.

Retailers are "very worried", Kumar Rajagopalan, CEO, RAI, said, adding that it is hardly the time to create a financial burden on an industry that is trying to limp back to normalcy.

Consumers too are facing inflationary pressure on every front, and price hikes now could impact discretionary purchases, said others.

"From January onwards, this (GST) will come into play. This will impact our margins, and obviously, when the prices go up, it has an impact on consumption," said Sunil Sethi, executive chairman, Modenik Lifestyle, which manufactures innerwear and casual clothing for men and women under the Dixcy and Enamor brands.

Consumers will search for discounts, he said. "Manufacturers are also going to be constrained in terms of offering discounts because they are also getting hit by higher costs," he said.

Sethi expects value apparel to benefit in such an environment