Tax concessions could boost consumer spending, but external environment challenging: RBI MPC Member

At the outset, my usual disclaimer. Comments are my opinions, not of the MPC. Even as of now, several high frequency indicators, while having moderated, still suggest significant resilience in economic activity. Rural demand is expected to remain robust, given the normal monsoon. The concessions on direct income taxes and the proposed changes in GST (goods and services tax) should put more disposable income in the hands of consumers. Yet, the external environment is likely to be challenging, both on current and capital accounts. If the 50 per cent tariffs on exports to the US persist, growth will likely be impacted.

As I note in my statement, given this level of extant and evolving uncertainty, it is difficult to provide even a modicum of forward guidance at this point. The monetary policy response will continue to be based on incoming data and be taken on a meeting-by-meeting basis.

What is your assessment on the recent announcement on GST rationalisation, and India’s rating upgrade by S&P Global? How do you think these will benefit the Indian economy?

The proposed changes in GST should initially result in a fall in prices of most goods and services. However, with the larger disposable incomes likely to incentivise consumption demand, the second-round effects of output, investment and growth on the prices of at least some goods and services are difficult to predict. The S&P ratings upgrade is a long overdue and welcome recognition of the robustness of India’s macroeconomics and should both facilitate foreign capital flows and reduce the cost of this capital.

With the GST rejig, consumption demand is likely to improve. Do you think this could translate into higher private capex?

Yes, everything else remains the same. However, the present uncertainty about the direct, secondary and tertiary impacts of the tariffs and the overall external environment might deter investment decisions in the near term till more clarity emerges on the likely outcomes.

Looking forward, what structural changes in India’s economy should monetary policy focus on—beyond just inflation control—to support long-term sustainable growth?

The MPC’s mandate is price stability while continuing to support growth. Monetary policy cannot directly address structural changes, but is definitely affected by it. RBI and other financial sector regulators have progressively designed regulations both to make policy transmission more efficient and to foster greater financial stability. The credit ecosystem has become deeper and more inclusive. IBC (Insolvency and Bankruptcy Code) has improved the stressed asset resolution process. The other structural reforms undertaken by the Government has also enabled more micro and small borrowers to access credit.

If monetary policy decisions are often justified as being “data-driven,” why does the MPC generally appear reactive rather than proactive—always behind the curve on inflation and growth?

Policy decisions are always data-driven, using a mix of available data and forecasts. I disagree with your view on appearing reactive. Yes, of late, inflation forecasts have tended to diverge from actuals, and the media has reported that RBI is working on improving statistical models to improve forecasts. Note also that the median inflation forecast of the RBI survey of professional forecasters has been almost as wrong on the recent vegetable price deflation. Also, as you are aware, estimates of jobs in the US have undergone significant revisions, so these problems exist across geographies. As to MPC decisions, Keynes is reported saying “when the facts change, I change my mind”.

Data shows that the bank corporate loan book in Q1 saw a muted growth. Even loans to industry slowed to a 13-quarter low in April-June 2025. When do you see private capex picking up?

As RBI Governor’s statement noted, while bank credit to corporates, particularly the large segment, has been muted, the total flow of financial resources from non-banks (both domestic and foreign sources) remained at almost similar levels during April-July 2025-26 as compared with the corresponding period of last year. Given the relative drop in respective interest rates, there has been some shift in credit demand away from banks. This is not to say that private sector investment should not be further incentivised.

In your statement in the minutes, you mentioned that if higher tariffs persist, they could adversely impact India’s growth in FY26, and probably beyond. Some economists expect that a 50% tariff could bring down India’s FY26 GDP to around 6%. In your opinion, what impact would elevated tariffs have on our economy?

If the 50 per cent tariff rate persists, this is likely to impact growth. Multiple analysts have given estimates of the impact on GDP growth. It is difficult to quantify the secondary and tertiary impacts via job losses, investment decisions, supply chain dislocations, official counterbalancing measures, etc.

US President Donald Trump referred to India as a “dead economy’. Do you see such comments affecting investor confidence?

It would take much more than an off the cuff comment to deter investors; the credit ratings upgrade is a testament to that. The measures on improving the investment environment, those already ongoing and more in the pipeline, will counter some of the trade related uncertainty.

Will there be any impact on domestic inflation, if India reduces oil purchases from Russia?

Global oil prices will likely rise, given reduced supply from Russia. There will be macroeconomic impacts, but the impact on retail inflation will depend on the extent petrol and diesel pump prices are increased. Note that if this happens, there is also a likelihood of the penal tariffs being removed.