GST rate changes unveiled on Sept 3 are expected to have a significant bearing on economic outcomes. The changes affect more than 400 goods and services, with the median rate on these items falling to 5% from 12%. This should provide a much-needed boost to domestic economic activity.
The rationalisation should spur higher discretionary spending on additional goods and services. It could also lead to upgrades in purchases of better-quality products or added features for some consumer goods categories, at similar or slightly higher spending levels. However, part of these savings may also be channelled towards debt servicing or building up savings, especially by lower- and middle-income households.
The timing of these changes - the onset of the festival season - is opportune. Besides, the relatively short time span between the date of announcement and implementation (Sept 22) helps address concerns around deferment of purchases and treatment of tax on inventories.
The rationalisation is expected to augur well for consumer-oriented sectors such as FMCG, apparel, textiles, electronics, 2-wheelers, passenger cars and hotels, making these more affordable, and encouraging upgrades and first- time purchases. Besides, the cut in rates on medicines, some medical supplies and equipment, and exemption on health insurance premiums are expected to enhance healthcare affordability and accessibility for patients, boding well for the pharma and healthcare sectors. Further, investment-related sectors such as commercial vehicles and cement, which feed into construction activities, also stand to benefit from the lowering of GST rates.
Higher domestic consumption would augur well for economic activity in H2 FY26. Ideally, a boost in domestic consumption could offset part of the adverse impact of Trump's tariffs on about half of India's exports to the US. Improved outlook for India's GDP growth for H2 FY26, along with the better-than-expected Q1 print, has led to revising FY26 GDP growth projections to 6.5% from 6%.
A desire to boost market share should result in a quick pass-through of rate rationalisation in various sectors. Accordingly, GST rate changes are expected to have a meaningful impact on inflation prints. Migration of items from the 18% or 12% slabs to the lower 5% slab largely pertains to food and miscellaneous segments in the CPI basket, including daily essentials, durables and some services.
Notably, some automobile OEMs have announced discounts and price reductions after GST cuts ahead of the festive season. Several FMCG companies have also announced they will pass post-cut benefits to end-consumers.
Overall, a little more than 10% of the CPI basket is experiencing a decline in prices. A reduction of about 25-50 bps in headline CPI inflation prints from Q3 FY26 through Q2 FY27 owing to GST rationalisation is expected. The average CPI projection for FY26 has been pared down to 2.6% from the earlier estimate of 3%. Moreover, the GST rejig is likely to exert a softening bias on the inflationary expectations of households, a key marker for MPC to assess monetary policy outcomes as it meets next week.
While the impact of GST rationalisation on different sectors, economic activity and inflation is relatively clear, its impact on the fisc remains somewhat ambiguous. GoI had highlighted a net revenue foregone of ₹0.5 tn. This seems manageable and can be comfortably absorbed by GoI and states. Besides, the second-round effects of higher spending resulting in higher indirect and direct tax collections could also offset part of this amount.
Overall, GST rationalisation has come at the right time to support India's macro outlook. Let's see how it turns out once the numbers are released closer to the year-end.
(The writer is MD & Group CEO, ICRA)
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The rationalisation should spur higher discretionary spending on additional goods and services. It could also lead to upgrades in purchases of better-quality products or added features for some consumer goods categories, at similar or slightly higher spending levels. However, part of these savings may also be channelled towards debt servicing or building up savings, especially by lower- and middle-income households.
The timing of these changes - the onset of the festival season - is opportune. Besides, the relatively short time span between the date of announcement and implementation (Sept 22) helps address concerns around deferment of purchases and treatment of tax on inventories.
The rationalisation is expected to augur well for consumer-oriented sectors such as FMCG, apparel, textiles, electronics, 2-wheelers, passenger cars and hotels, making these more affordable, and encouraging upgrades and first- time purchases. Besides, the cut in rates on medicines, some medical supplies and equipment, and exemption on health insurance premiums are expected to enhance healthcare affordability and accessibility for patients, boding well for the pharma and healthcare sectors. Further, investment-related sectors such as commercial vehicles and cement, which feed into construction activities, also stand to benefit from the lowering of GST rates.
Higher domestic consumption would augur well for economic activity in H2 FY26. Ideally, a boost in domestic consumption could offset part of the adverse impact of Trump's tariffs on about half of India's exports to the US. Improved outlook for India's GDP growth for H2 FY26, along with the better-than-expected Q1 print, has led to revising FY26 GDP growth projections to 6.5% from 6%.
A desire to boost market share should result in a quick pass-through of rate rationalisation in various sectors. Accordingly, GST rate changes are expected to have a meaningful impact on inflation prints. Migration of items from the 18% or 12% slabs to the lower 5% slab largely pertains to food and miscellaneous segments in the CPI basket, including daily essentials, durables and some services.
Notably, some automobile OEMs have announced discounts and price reductions after GST cuts ahead of the festive season. Several FMCG companies have also announced they will pass post-cut benefits to end-consumers.
Overall, a little more than 10% of the CPI basket is experiencing a decline in prices. A reduction of about 25-50 bps in headline CPI inflation prints from Q3 FY26 through Q2 FY27 owing to GST rationalisation is expected. The average CPI projection for FY26 has been pared down to 2.6% from the earlier estimate of 3%. Moreover, the GST rejig is likely to exert a softening bias on the inflationary expectations of households, a key marker for MPC to assess monetary policy outcomes as it meets next week.
While the impact of GST rationalisation on different sectors, economic activity and inflation is relatively clear, its impact on the fisc remains somewhat ambiguous. GoI had highlighted a net revenue foregone of ₹0.5 tn. This seems manageable and can be comfortably absorbed by GoI and states. Besides, the second-round effects of higher spending resulting in higher indirect and direct tax collections could also offset part of this amount.
Overall, GST rationalisation has come at the right time to support India's macro outlook. Let's see how it turns out once the numbers are released closer to the year-end.
(The writer is MD & Group CEO, ICRA)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Ramnath Krishnan
Ramnath Krishnan is managing director and group CEO, Icra, Gurgaon, Haryana