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The government may not have yet estimated the impact of its wide-ranging Goods and Services Tax (GST) rate cuts, but economists see the country’s GDP growth getting a boost of as much as 60 basis points (bps) and inflation cooling by nearly 100 bps over a full year.
Addressing reporters late on Wednesday after a marathon meeting of the GST Council, Finance Minister Nirmala Sitharaman had said the effect of the lower indirect tax rates – which will come into effect from September 22 – could only be estimated after a couple of months. But she did say the impact on the GDP would be “very positive”. And economists are in agreement.
According to Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank, the GST rate cuts will likely increase India’s GDP growth by 60 bps over 12 months, allowing Sen Gupta to retain her growth forecast of 6.6 per cent for the current fiscal ending in March 2026. Crucially, this is higher than the Reserve Bank of India’s (RBI) projection of 6.5 per cent and takes into account the negative impact of the 50 per cent tariff slapped on Indian goods by the US from August 27.
The Indian economy has already had a much better start to 2025-26 than anyone anticipated, with GDP growth in April-June at a five-quarter high of 7.8 per cent. Wednesday’s GST rate cuts are expected to boost private consumption, which rose 7 per cent in April-June. While this was lower than the 8.3 per cent growth a year ago, it was higher than 6 per cent in January-March.
The RBI expects the GDP to clock a growth of 6.5 per cent in the current fiscal.
The immediate impact of the GST rate cuts will be lower prices, which will then incentivise higher purchases by households. Economists think India’s headline retail inflation rate could ease by 100 bps or more if companies fully pass on the tax benefits to consumers. ICICI Bank, for instance, sees the overall impact on CPI inflation at 110-120 bps.
However, Standard Chartered Bank’s economists led by Anubhuti Sahay are more circumspect, estimating inflation to decline by up to 60 bps on an annual basis, with a partial pass-through resulting in Consumer Price Index (CPI) inflation this fiscal being lower by 20-25 bps considering the tax cuts will come in force only from September 22.
Whether the pass-through of the cuts to the consumer is full or partial, economists are already lowering their inflation forecasts for the year. IDFC’s Sen Gupta, for instance, has reduced her inflation forecast for 2025-26 by 30 bps to 2.4 per cent. The RBI’s forecast, meanwhile, is a much higher 3.1 per cent. CPI inflation fell to an eight-year low of 1.55 per cent in July.
The GST rate cuts come after years of discussions, with the Group of Ministers on the same constituted in September 2021. And while the government has refused to characterise the fiscal consequences of the cuts as ‘revenue loss’, economists see the result being a gain for buyers, and in turn, the economy.
“Crudely put, the government’s loss is the consumer’s gain,” HSBC economists said on Thursday, estimating that higher consumption due to the tax cuts can boost GDP growth over a year by 20 bps.
It’s not just the tax cuts themselves that will encourage buying. According to Madhavi Arora and Harshal Patel of Emkay Global Financial Services, the end of the compensation cess from September 22 – except for tobacco and related products – will be a “de-facto demand boost for the economy”.
The government expected to collect Rs 1.67 lakh crore as compensation cess in the current fiscal. This, however, is to be strictly used to repay the Rs 2.69 lakh crore it had borrowed in the pandemic-hit 2020-21 and 2021-22 to bridge the shortfall in cess that was being used to compensate states for weak revenue growth.
