GST reforms to boost consumption; to be fiscally neutral and disinflationary: Analysts

New Indian Express

6 hours ago

MUMBAI: Brokerages have hailed the proposed simplification and rate rejig of the GST regime saying, coming in the midst of the export tariff uncertainties this will be a big boost to the sagging domestic consumption story at the same time not leading to any serious fiscal slippages as it will lead to only 30 bps impact on the GDP, making the tax give-aways fiscally fully viable.
While delivering the 79th Independence day speech, prime minister Narendra Modi had said he would be delivering a Diwali surprise with a simplified two-rate GST structure. Soon after the finance ministry said the currently four-layered GST with 5, 12, 18 and 28% taxes will just be a two-rate tax regime -- standard and merit, which would mean that 12 and 28% slabs will give way to 5 and 18% regime.
In a note on Monday, Tanvee Gupta Jain, the chief economist at UBS Securities India said the next set of GST reforms will likely buoy consumption without impacting the fiscal consolidation apart from being disflationary.
'There was a need for policymakers to implement counter-cyclical policy measures to support domestic economic growth amidst tariff uncertainties. The timing of GST reform is apt and this potential policy stimulus along with personal income tax relief (which would deliver a $15-billion consumption bosst), front-loading of repo rate cuts of 100 bps, softer inflation which is boosting purchasing power and improved credit availability on regulatory easing should help buoy household consumption over the next two to three quarters,' Gupta Jain said.
'The fiscal cost of the proposed GST rate rationalisation is also manageable as the revenue loss of GST rationalisation would be only Rs 1.1 trillion or 0.3% of GDP annually. For FY26, the revenue loss of Rs 43,000 crore or 0.12% of GDP would get offset from the surplus cess collections and higher than budgeted RBI dividend transfer (Rs 2.7 trillion versus Rs 2.1 trillion budgeted,' she said.She also believes GST cut can have a larger multiplier impact than income or corporate tax cuts as it directly affects consumption at the point of purchase, potentially leading to higher consumer spending.
GST tax multiplier is higher at -1.08 when compared to personal income tax multiplier at -1.01 and corporate tax multiplier at -1.02, he said further. In terms of sectors, she said the proposed removal of 12% GST rate would be a positive for processed foods, garments priced above Rs 1000, footwear, tractors, farm equipment, construction material, hotel amongst others. In a note, domestic brokerage Motilal Oswal Financial Services said the pr0posed rejig of the second-generation GST reforms have the potential to reset consumption dynamics and improve sector profitability.
'With slab rationalisation expected to bring down indirect taxes on key goods and services, several industries are set to see a demand boost, margin relief, or both,' it said, adding the the biggest beneficiaries will be auto, banks and non-banks, cement, FMCG, insurance, hotels, white goods and retail.
Detailing the impact, it said cars and commercial vehicles will get cheaper as currently they are in the 28% slab, which may come down to 18%. On the benefits of banks and NBFCs and the resultant spike in credit growth tailwind, Motilal Oswal said with household consumption set to rise, demand for financing will pick up and private banks could see faster retail loan growth.
A lower tax regime on cement will boost infrastructure and housing boost as the current rate 28% will come down to 18%, which will reduce cement prices by 7–8%.Lower GST on consumer staples will lower costs, boosting higher demand as several raw materials shift to lower slabs, reducing input costs and supporting consumption of core staples.
Lower rate on consumer durables like ACs and appliances will make these more affordable boosting demand. Also, mid-market hotels with room rates below Rs 7,500 will boost hotel inventory as their rates may come down from 12% to 5%.
There is also a chance that GST on insurance bought by senior may attract lower rate from the 18% now or even waived. Rising demand for durables, staples, and discretionary goods will aid logistics players, quick commerce platforms to gain from higher household consumption, while organised retailers would benefit from footwear and other mass products shifting to lower slabs which in turn should shrink the tax arbitrage of the unorganised sector.
Gupta Jain of UBS further said, 'it is important to note that the purpose is to correct the inverted duty structures in some of these categories especially textiles (where tax on yarn and fabric is 12% but on garment below Rs 1,000 is 5%) to align input and output tax rates so that there is a reduction in the accumulation of input tax credit. This would support domestic value addition.
The prominent goods in the 28% slab that could benefit from moving to lower slab include air-conditioners, automobile (largely 2-wheelers, small cars), cement amongst others,' she said. On the impact of lower GST rates on inflation she said it would be largely deflationary as GST rate cut would also lower inflationary pressures and likely increase the probability of further monetary easing by RBI.
'With underlying inflationary pressures remaining benign and considering RBI's neutral policy rate assumption of 1.4-1.9%, we see space for the terminal repo rate to fall to the 5.0-5.25% range. We maintain our view that there is space for 25-50bps rate cut in rest of FY26 to support growth,' Gupta-Jain said.