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Informist, Thursday, Sept. 4, 2025

 

By Shubham Rana

 

NEW DELHI – The biggest overhaul of the Goods and Services Tax regime since its introduction in 2017 is expected to boost consumption demand with the country heading into the festival season, economists said. There is, however, no consensus on the extent of the rise in demand post the GST rejig, with some economists projecting a minimal rise in GDP growth while others seeing an increase of over 50 basis points.

 

Despite the expected boost to demand, most economists have not raised their GDP growth forecasts for 2025-26 (Apr-Mar) after the GST changes were announced. While some recently raised their projections because of the higher-than-expected GDP growth of 7.8% in the June quarter, others are of the view that the consumption boost triggered by the GST rejig may only be enough to offset the impact of US tariffs on India's growth. The GST revamp is also likely to pull down inflation significantly if the rate cuts are passed on fully to consumers, economists said.

 

The GST Council--which includes the Centre and all states and Union Territories--late Wednesday approved a two-slab GST rate structure of 5% and 18%, with a new special tax rate of 40% for the so-called sin goods. Earlier there were four main rate slabs, including 12% and 28%. The changes to the GST rates will come into effect from Sept. 22, the beginning of the months-long festival season in India.

 

This is the latest in a series of measures policymakers have taken this year to keep economic growth on track, especially in the face of global geopolitical and trade risks. The central government first announced large income tax breaks in the Union Budget in February, which was followed by 100-bps of interest rate cuts by the Reserve Bank of India.

 

Despite these measures, consumption growth has been moderate because of low real wage growth in the country and this was amplified by the uncertainty over US tariffs. According to latest government data, nominal private final consumption expenditure grew at a seven-quarter low pace of 9.2% in the June quarter. It fell below double-digit growth for the first time since Jul-Sept FY24.

 

Nominal private final consumption expenditure growth was the highest ever in the June quarter of FY23 at 31.0% and has averaged 11.7% since FY13.

 

With the US imposing a 50% tariff on imports from India--and with economists lowering current financial year GDP growth estimates to around 6% against the RBI projection of 6.5%--the Indian government was presumably forced to act to keep growth from moderating. 

 

Prime Minister Narendra Modi first announced the Centre's proposal to reform the GST on Aug. 15, calling it a "Diwali gift" to the common man. The GST Council cleared the changes to the indirect tax in less than a month, showing the urgency to make the most of the upcoming festival season.

 

"This is good for consumption, good for GDP growth for now. It is a good measure in terms of propping up consumer demand, especially at certain income brackets," Sakshi Gupta, principal economist at HDFC Bank, said. "Lower- and middle-income classes will benefit more, given the changes that are announced," Gupta said.

 

Most items that are consumed by the masses regularly such as dairy items, butter and other fats, namkeens, etc. now face a tax of 5%, down from 12?rlier. Personal goods such as soaps, shampoo, and toothpaste, which earlier faced an 18% tax, will now attract a 5% tax. Two-wheelers with engine capacity not exceeding 350 cubic centimetres, small four-wheelers, and electronic items such as large televisions and dishwashers will now face a 18% GST instead of the earlier 28%.

 

"Assuming a complete passthrough of rates, we note that most items of mass consumption, such as bulk of 2Ws (two-wheelers), entry-level PVs (passenger vehicles), bulk of consumer durables, bulk of consumer staples and health insurance, may benefit, subject to varying degrees of demand elasticity, while commodities such as cement may not see any impact," Kotak Mahindra Bank Chief Economist Upasna Bhardwaj said in a report.

 

A key sector that may benefit from lower taxes is agriculture, with GST on tractors reduced to 5% from 12%. "This in turn will make the agricultural equipment more affordable, since farmers are already grappling with higher input costs," Jahnavi Prabhakar, economist at Bank of Baroda, said. "Overall, the move is expected to be beneficial for small farmers and boost rural demand."

 

The GST rate rationalisation will support consumer demand and cushion the risks to growth from tariff related uncertainties, Bhardwaj said, and added that income tax cuts and GST rate cuts could potentially push GDP growth up by around 60 bps in FY26.

 

Economists at ICICI Bank and Emkay Global Financial Services also see a 60 bps rise in GDP growth from the changes in GST rates but projections from other economists vary. HDFC Bank's Gupta and economists at HSBC estimated GDP growth could rise by around 20 bps over the next 12 months. Garima Kapoor, economist at Elara Capital, in a note said the demand boost from changes in GST structure can add 100 to 120 bps to GDP growth over next four to six quarters.

 

"Crudely put, the government's loss is the consumer's gain. Over a year, led by stronger consumption, GDP growth can rise by 0.2ppt (20 bps), HSBC economists Pranjul Bhandari and Aayushi Chaudhary said in a report. "If we add on the benefits from the income tax cut earlier this year, and a lower debt servicing burden due to repo rate cuts, the overall boost to consumption can be 0.6% of GDP. Of course, a part of this could be saved instead of spent, lowering the net boost," Bhandari and Chaudhary noted.

 

But not everyone shares the optimism on growth. According to Dhiraj Nim, economist at ANZ Bank India, private consumption is unlikely to rise sharply because of the GST changes. "From a consumption perspective it only matters to categories for which consumption is elastic with respect to price," Nim said.

 

"People who are considering purchasing white goods, for some of them, it just falls under affordability range now. But somebody who is buying one car is not going to buy two cars now," Nim said. "It may increase white goods consumption, and auto purchases to some extent, but it won't be a gamechanger."

 

Economists also expect lower GST on most items to translate into lower inflation over the next year if companies pass on large chunk of the benefits to customers. "With around 14% of CPI basket witnessing a benefit of lower taxes, impact on headline CPI would depend upon pass-through and grammage. Personal, household and food products have seen shrinkflation which should reverse thus implying overall impact on CPI of around 0.5-0.6%," ICICI Bank said in a report.  End

 

 

With inputs from Pratiksha and J. Navya Sruthi

Edited by Ashish Shirke

 

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