MUMBAI: Economists have given the thumbs-up to the GST rejig, saying the much-anticipated decision to reduce the rate of levies is neither fiscally loose nor inflationary. It will boost growth by way of incremental consumption -- the biggest missing cog in the growth wheel for years -- which in turn may lead to the revival of private sector capex that has been missing for more than a decade now, they said.
The well-timed move will help partly offset the negative impacts of the punitive US tariffs that kicked in late last month, they added.
They see the fiscal implication by way of presumptive revenue loss of Rs 48,000 crore for this fiscal at only 0.13-14 bps of GDP. But some of them even say that the likely consumption boom can add 0.6% to the GDP on a full year basis.
Soumyakanti Ghosh, the chief economic advisor to State Bank, said the GST cuts unleash a plethora of benefits in the form of consumption boost primarily from the middle class, low inflation, ease of business and ease of living as the tax cuts represent a strategic, principled, and citizen-centric evolution of the indirect tax framework.
“The rate rationalization has brought down the effective weighted average GST rate from 14.4% at the time of inception to 11.6% in September 2019. With the current rejig, effective weighted average GST rate may come down to 9.5% because of the 453 goods on which the rates have changed, as much as 413 of them have lower rates now and only 40 goods have higher rates now and 295 goods now have now 5%/Nil from the earlier 12%,” he said.
Ghosh disputes the Rs 48,000 crore presumed fiscal impact/revenue loss by government assessment, saying, “Based on the trend growth and consumption boost, we expect only Rs 3,700 crore revenue loss, which has no impact on fiscal deficit.”
Similarly, he also does not see any pressure on inflation due to increased consumption, saying, “Since the GST rates of essential items (around 295 items) has declined from 12% to 5%/Nil, the CPI inflation in this category may also come down by 25-30 bps in FY26 after considering a 60% pass-through effect on food items."
“Apart from this, the tax cuts on services also leads to another 40-45 bps reduction in CPI inflation on other goods and service items, considering a 50% pass-through effect. Overall, we believe CPI inflation may be moderated in the range of 65-75 bps over FY26-27,” he added.
Describing the much-delayed and much-needed rationalisation of the GST regime from a multi-rate taxation structure to a three rate structure with much lower rates, Aditi Nayar, chief economist at Icra Ratings, said, “The well-timed move has positive implications for consumer demand, and producer sentiment, which together will help partly offset the negative impact of the US tariffs.”
On the impact of the move on private sector capex due to the likely consumption boost, she said capex decisions may get a boost for domestic consumption-oriented sectors.
Standard Chartered Bank India economists Anubhuti Sahay and Saurav Anand on the other hand see the GST cut boosting GDP by 0.1-0.16% in the current fiscal on consumption drive and lowering inflation by 40-60 bps on for a full year.
However, they refused to revise upwards the GDP and inflation forecasts citing US tariffs, weather risks and mid-year GST implementation.
Though there is limited revenue loss due to the GST cut to soothe fiscal worries, they still see some pressure (0.15-0.20% of GDP) on the combined fiscal deficit front.
“The GST reduction is likely to reduce inflationary pressure and boost GDP growth over the next four quarters. While the loss in revenue can widen the fiscal deficit, we think it would be premature to bake in a slippage so early in the year,” they concluded.
According to Madhavi Arora, the chief economist at domestic brokerage Emkay Global Financial Services, the move is a significant shift aimed at stimulating growth through consumption-led strategies, especially as indirect taxes are regressive in nature.
The loss to the exchequer is estimated at 0.14% of GDP, with states possibly taking a larger hit. However, with compensation cess ceasing to exist (nearly 0.5% of GDP), there is a de-facto demand boost for the consumption sector. Instead of this presumed loss, she in fact sees increased consumption boosting GDP to the tune of 0.6% on an annualised basis as it should boost mass consumption in FMCG, consumer durables, autos, and similar sectors.
Icra has marginally revised up growth forecast for this fiscal to 6.5% (from 6.3%) saying since the new rates are coming in earlier than expected (from September 22), which is the start of the consumption-heavy festive season, this may moderately offset the Rs 48,000 crore revenue loss by way of higher consumption.
Stating that the GST rejig is demand-accretive, with a modest fiscal cost, Radhika Rao, senior economist at DBS Bank, said the lower GST rates will be positive for growth in the second half and the next, besides improving operational efficiency and expanding the size of the formal economy.
“Higher elasticity of demand for low-cost FMCG products and durables is likely to make the tax cuts consumption-accretive, with these concessions to provide a one-time boost to growth,” Rao said, without quantifying the prospective growth uptick.
“The net fiscal implication is expected to be around Rs 48,000 crore or a paltry 0.13% of GDP, after accounting for Rs 93,000 crore revenue loss but Rs 45,000 is expected to be collected on sin/ luxury items,” Rao said, adding this is too inconsequential to make any fiscal slippages. “With the recent sovereign rating upgrade by S&P, we don’t expect any compromise on the fiscal deficit target.”
On the impact on inflation, which after years is below the RBI’s target level even from the lower band, Rao said, “The GST cuts will in fact be disinflationary, partly countered by downward rigidity in prices/mark-ups to preserve margins as government had already called on suppliers not to increase prices ahead of the change. While watching the disinflationary impact, we maintain the inflation forecast for FY26, with pass-through likely to be evident in the tail end of the year and positive for FY27, at 4.3%.”
