Will GST Overhaul and Policy Easing Propel Consumption and Domestic Demand in India?
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Synopsis
A significant overhaul of GST tax rates and supportive measures are set to enhance consumption and domestic demand in India, according to a recent Morgan Stanley report. This change, alongside other fiscal adjustments, promises to reshape the economic landscape ahead of the festive season.
Key Takeaways
- GST reform could significantly impact economic growth.
- Lower indirect taxes are projected to enhance affordability.
- Potential GDP stimulus estimated at 0.5-0.6%.
- CPI inflation may decrease by 40bps.
- Upcoming council meeting to finalize new GST rates.
New Delhi, Aug 18 (NationPress) A potential revamp of GST tax rates, along with backing from additional measures such as personal income tax reductions, monetary policy relaxation, indicators of job growth resurgence, and rising real wages, enhances the forecast for consumer spending and domestic demand in India, according to a report by Morgan Stanley released on Monday.
The anticipated new GST framework is expected to significantly influence growth, fiscal stability, and CPI inflation, which in turn will affect monetary policy decisions.
In the short term, there may be some effects on volume growth as consumers might delay their purchases until there is clarity on the new GST framework.
“However, once the new GST rates are implemented, we can expect a rebound in deferred demand, aided by improved affordability. In fact, lower indirect taxes tend to enhance affordability, particularly for low-income households due to the regressive nature of indirect taxes,” the report elaborated.
Morgan Stanley's sensitivity analysis suggests, “we project the total stimulus impact to be around 0.5-0.6 percent of GDP annually.”
CPI inflation could experience a reduction of 40bps, while both central and state fiscal balances may face challenges due to revenue losses. This could be partially mitigated by increased GDP growth leading to better direct and indirect tax collection.
“We anticipate a net positive effect on growth as the multiplier effect of indirect tax cuts is estimated at 1.1, suggesting a potential upside of 50-70bps,” the report highlighted.
During the Independence Speech, Prime Minister Narendra Modi announced forthcoming next-generation GST reforms ahead of Diwali, aiming to benefit consumers, small businesses, and MSMEs.
In response, the Finance Ministry introduced its proposal for a streamlined two-tier GST structure based on three key pillars: structural reforms, rate rationalization, and enhanced living standards.
The proposed GST overhaul aims to retain one standard and one merit slab, with possible GST rates set at 5 percent and 18 percent, respectively.
The upcoming GST council meeting, likely scheduled for September, will finalize new GST rates, assess demand during the festive period, monitor trends in headline/core CPI for policy easing considerations, establish a timeline for the 8th pay commission, and update trade/tariffs. These are the crucial elements to watch, as stated in the report.
Point of View
We recognize that the proposed GST reforms could be a game-changer for the Indian economy. With a focus on consumer benefits and the empowerment of small businesses, these changes could provide the much-needed stimulus for growth. It’s essential that we closely monitor these developments to ensure they meet the needs of the nation.
NationPress
20/08/2025
Frequently Asked Questions
What changes are proposed in the GST framework?
The proposed changes include a two-tier GST system with one standard and one merit slab, potentially set at 5% and 18% respectively.
How will the GST overhaul impact consumers?
The GST overhaul is expected to improve affordability for consumers, particularly benefiting low-income households due to lower indirect taxes.
What is the estimated GDP stimulus from the GST reforms?
Morgan Stanley estimates the total size of the stimulus to be about 0.5-0.6% of GDP on an annualized basis.
When will the new GST rates be finalized?
The new GST rates are expected to be finalized in the upcoming GST council meeting, likely in September.
What other measures accompany the GST reform?
Additional measures include personal income tax cuts, monetary policy easing, and initiatives aimed at job growth and improving real wages.
