MUMBAI: Most economic analysts in the country have welcomed the much-delayed and much-needed rationalisation of the GST regime, which shifts from a multi-rate structure to a simplified three-rate system with significantly lower rates. They believe the move is well-timed and will have a positive impact on consumer demand.
The two-slab structure for essential and daily-use products, along with lower taxes on a wider basket of goods, is also expected to partly cushion the adverse impact of punitive US tariffs. Importantly, analysts note that the reduced rates are neither fiscally imprudent nor likely to trigger inflationary pressures.
“The GST rejig is a well-timed move and has positive implications for consumer demand that has been lagging for too long, and producer sentiment, which together will help partly offset the negative impact of the punitive US tariffs,” Aditi Nayar, chief economist at Icra Ratings, said in a note.
On the presumed Rs 48,000-crore revenue loss this fiscal, she said “any revenue foregone by the Centre and the states would effectively have to be made up through other revenue streams or expenditure rationalisation. On the impact of the move on private sector capex, which has been the biggest missing cog in the growth story, she said capex decisions may get a boost for domestic consumption-oriented sectors.
“As of now, the RBI may choose to retain its FY26 growth forecast at 6.5%, unless there is a thawing in the tariff/penalty situation later this month," Nayar said.
Icra has now marginally increased the growth forecast for this fiscal to 6.5% saying since the early adoption of new rates from September 22, which is the start of the consumption-heavy festive period, the moderate revenue likely to be foregone in the second half of this fiscal would however necessitate other revenue mobilization or expenditure saving measures.
Stating that the GST rejig to be 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 of this fiscal 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, adding a durable improvement in demand would thereafter return to employment and income prospects.
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, she said. She also doesn’t see the move leading to any fiscal slippages saying “with the recent sovereign rating upgrade, we don’t expect any compromise on the fiscal deficit target.”
Moreover, the GST cuts will be disinflationary, partly countered by downward rigidity in prices/mark-ups to preserve margins as the 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%.