Can GST Reforms Drive Down Inflation and Enable RBI to Reduce Repo Rate by Another 25 Basis Points This Year?
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Synopsis
In an insightful report, it is suggested that recent GST tax cuts may lower inflation and encourage the RBI to reduce the repo rate again. Discover how these changes can impact consumers and the economy at large!
Key Takeaways
- GST tax cuts can significantly reduce inflation.
- RBI may lower repo rate by another 25 basis points.
- Essential goods have benefited from rate reductions.
- Overall GDP growth could rise by 0.2 percentage points.
- Improvements in GST registration and refunds could enhance business operations.
New Delhi, Sep 4 (NationPress) A recent report indicates that reducing GST tax rates could significantly decrease inflation if businesses fully transfer the benefits to consumers. This move would potentially allow the Reserve Bank of India (RBI) to further lower the repo rate by 25 basis points in the fourth quarter of this year.
The GST cuts could potentially reduce the headline Consumer Price Index (CPI) inflation by as much as 1 percentage point.
“However, if the benefits are only partially passed on to consumers, the inflation reduction might be closer to 0.5 percentage points. We anticipate the RBI will implement another 25 basis point rate cut in 4Q25, adjusting the repo rate to 5.25 percent,” stated an HSBC report.
From a consumption perspective, various essential items have experienced rate reductions, including toothpaste, shampoo, small cars, air conditioners, and medicines.
On the production side, several sectors will see a decrease in tax burdens for inputs such as tractors in agriculture, leather and marble in labor-intensive goods, cement in construction, renewable energy devices in the power sector, and medical devices in healthcare.
Additionally, certain exemptions have been introduced, with individual life and health insurance policies now exempt from GST.
The report asserts that government losses translate into consumer gains.
Over the next year, driven by increased consumption, GDP growth could increase by 0.2 percentage points. However, this requires the government to avoid implementing a tighter fiscal policy that could negate the boost in consumption.
“It is crucial to view the GST cuts within a broader framework. When considering the benefits from the earlier income tax reductions (0.3 percent of GDP) and a decreased debt servicing burden due to repo rate cuts (0.17 percent of GDP), the total boost to consumption could amount to 0.6 percent of GDP,” the report elaborated.
“Of course, some of this increase might be saved rather than spent, which would diminish the overall impact,” it continued.
The rationalization of GST rates extends beyond mere reductions in tax rates.
“Some adjustments were made to address the inverted duty issue concerning textiles and fertilizers. Plans have been established for simplified GST registration, pre-filled returns, and expedited refunds. Should these enhancements be realized, they will foster a more favorable business environment,” the HSBC report highlighted.
Point of View
It's clear that these GST reforms are a significant step towards boosting economic growth. The potential for lower inflation and increased consumer spending must be carefully managed to ensure sustainable development.
NationPress
04/09/2025
Frequently Asked Questions
How do GST tax cuts affect inflation?
GST tax cuts can lower inflation by reducing the overall cost of goods and services if businesses pass on the savings to consumers.
What is the impact of a repo rate cut?
A repo rate cut lowers borrowing costs, which can stimulate spending and investment, ultimately supporting economic growth.
What goods have seen GST rate cuts?
Essential items such as toothpaste, shampoo, small cars, air conditioners, and medicines have experienced GST rate reductions.
How could GDP growth be affected by these changes?
Increased consumer spending due to lower prices can boost GDP growth by approximately 0.2 percentage points.
What are the broader implications of GST reforms?
The GST reforms may enhance the ease of doing business and positively impact various sectors, contributing to overall economic improvement.
