GST Cuts: Boosting GDP & Lowering Inflation
The recent cuts in Goods and Services Tax (GST) rates by the Indian government are anticipated to have a significant impact on the economy. Economists predict a boost in GDP growth by 60 basis points, along with a reduction in retail inflation by 100 basis points over the year. Finance Minister Nirmala Sitharaman addressed the media, indicating that the effects of these tax cuts, effective from September 22, would take a couple of months to fully quantify. However, early indications suggest a very positive economic outlook.
According to Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank, these GST reductions are expected to raise India’s GDP growth to 6.6 percent for the current fiscal year, which is higher than the Reserve Bank of India's projection of 6.5 percent. This forecast takes into account the recent tariff impacts imposed by the US on Indian goods. The Indian economy has shown a better-than-expected start to 2025-26, with GDP growth reaching a remarkable 7.8 percent in the April-June quarter.
The cuts in GST are expected to lower prices, which should encourage consumers to spend more. Economists note that if businesses pass on the tax benefits to consumers fully, retail inflation could fall significantly, potentially easing by 100 basis points or more. ICICI Bank estimates a CPI inflation impact of 110-120 basis points, while some economists are more cautious, predicting a reduction of up to 60 basis points.
Despite the uncertainty regarding how much of the tax cut will be transferred to consumers, many economists are adjusting their inflation forecasts downward. For instance, Sen Gupta has revised her inflation forecast for 2025-26 to 2.4 percent, while the RBI maintains a higher estimate of 3.1 percent. The CPI inflation rate fell to an eight-year low of 1.55 percent in July, highlighting the current economic landscape.
The discussions surrounding these GST cuts have been ongoing since September 2021, and although the government refrains from labeling these changes as a 'revenue loss,' economists argue that they represent a direct benefit to consumers, thus stimulating the economy. HSBC economists highlighted that increased consumer spending could contribute an additional 20 basis points to GDP growth over the year.
Moreover, the cessation of the compensation cess, except for tobacco products, is expected to create additional demand in the economy. The government had planned to collect Rs 1.67 lakh crore from this cess in the current fiscal, which was intended to repay loans taken during the pandemic. Overall, these GST cuts are seen as a strategic move to enhance economic growth and consumer welfare in India.
