Economists give thumbs-up to GST rejig, rule out fiscal slippages or inflation build-up
According to Madhavi Arora, the chief economist at domestic brokerage Emkay Global Financial Services, the move is a significant shift aimed at stimulating growth through consumption-led strategies, especially as indirect taxes are regressive in nature.
The loss to the exchequer is estimated at 0.14% of GDP, with states possibly taking a larger hit. However, with compensation cess ceasing to exist (nearly 0.5% of GDP), there is a de-facto demand boost for the consumption sector. Instead of this presumed loss, she in fact sees increased consumption boosting GDP to the tune of 0.6% on an annualised basis as it should boost mass consumption in FMCG, consumer durables, autos, and similar sectors.
Icra has marginally revised up growth forecast for this fiscal to 6.5% (from 6.3%) saying since the new rates are coming in earlier than expected (from September 22), which is the start of the consumption-heavy festive season, this may moderately offset the Rs 48,000 crore revenue loss by way of higher consumption.
Stating that the GST rejig is demand-accretive, with a modest fiscal cost, Radhika Rao, senior economist at DBS Bank, said the lower GST rates will be positive for growth in the second half and the next, besides improving operational efficiency and expanding the size of the formal economy.
“Higher elasticity of demand for low-cost FMCG products and durables is likely to make the tax cuts consumption-accretive, with these concessions to provide a one-time boost to growth,” Rao said, without quantifying the prospective growth uptick.
“The net fiscal implication is expected to be around Rs 48,000 crore or a paltry 0.13% of GDP, after accounting for Rs 93,000 crore revenue loss but Rs 45,000 is expected to be collected on sin/ luxury items,” Rao said, adding this is too inconsequential to make any fiscal slippages. “With the recent sovereign rating upgrade by S&P, we don’t expect any compromise on the fiscal deficit target.”
On the impact on inflation, which after years is below the RBI’s target level even from the lower band, Rao said, “The GST cuts will in fact be disinflationary, partly countered by downward rigidity in prices/mark-ups to preserve margins as government had already called on suppliers not to increase prices ahead of the change. While watching the disinflationary impact, we maintain the inflation forecast for FY26, with pass-through likely to be evident in the tail end of the year and positive for FY27, at 4.3%.”