GST Rate Cut | Impact | Inflation | RBI Policy | Fiscal Deficit | 6 Points

Delhi

1. GST Council’s Historic Reform (Effective September 22, 2026)

   • The 56th GST Council Meeting simplified the tax system from a four-tier structure to a two-tier framework of 5% and 18%, with a 40% de-merit rate on select goods.

   • Out of 453 goods, 413 items saw GST rate reductions, while 40 goods had higher rates.

   • Nearly 295 essential goods previously taxed at 12% now fall under the 5% or NIL bracket.

2. Effective GST Rate Now at Record Low

   • According to Soumya Kanti Ghosh (SBI Chief Economist), India’s effective average GST rate dropped from:

     • 14.4% (2017) → 11.6% (2019) → 9.5% (2026).

   • This is one of the lowest GST tax burdens since inception.

3. Impact of GST Rate Cuts on CPI Inflation

   • Reduction of GST on essential goods (295 items) expected to lower CPI inflation by 25–30 basis points (bps) in FY26 (assuming 60% pass-through effect).

   • Lower GST on services may cut CPI inflation by another 40–45 bps (assuming 50% pass-through effect).

   • Overall, India could see CPI-based retail inflation cool ahead of the festive season.

4. Impact of GST Cuts on RBI Monetary Policy

   • Lower CPI readings give the RBI more flexibility in its monetary stance.

   • However, BofA Securities predicts the RBI will remain data-dependent and unlikely to cut repo rates immediately despite easing inflation.

5. Impact of GST Rate Cuts on Fiscal Deficit

   • Fiscal impact is expected to remain marginal.

   • Madhavi Arora (Emkay Global) estimates the reform could add ~0.6% of GDP annually to domestic demand, supporting sectors like FMCG, automobiles, and consumer durables.

   • The Department of Revenue believes stronger consumption and lower input tax credit adjustments will balance revenues.

   • Fiscal burden to be shared by Centre and states, with states taking a larger hit.

   • BofA Securities projects FY26 fiscal deficit at 4.4% of GDP, with no major slippage risk.

6. Key Sectors to Benefit from GST Rationalisation

   • FMCG, food products, automobiles, consumer durables, and retail services expected to see higher demand due to reduced GST burden.

   • Potential boost to festive season consumption and long-term GDP growth.