The recent Goods and Services Tax (GST) rate rationalisation, set to take effect from September 22, is projected to reduce Consumer Price Index (CPI) inflation by approximately 25 basis points (bps), while potentially widening the fiscal deficit by up to 40 bps, according to leading brokerage and policy analysts.
The GST Council’s decision to simplify the tax structure into two primary slabs—5% for essential goods and 18% for aspirational items—has been welcomed as a strategic move to stimulate consumption and ease inflationary pressures. A special 40% rate will continue to apply to sin goods such as tobacco and ultra-luxury products, with the compensation cess remaining in place until outstanding state revenue loans are repaid.
Analysts at Bernstein estimate that the central government’s fiscal deficit could widen by 20 bps in a baseline scenario, and up to 40 bps if the Centre absorbs the full revenue loss without adjusting capital expenditure. The government has pegged the total tax collection shortfall at ₹48,000 crore for FY26, though this figure may be mitigated by increased demand and higher GST buoyancy.
Jefferies projects a combined fiscal impact of ₹22,000–₹24,000 crore for the Centre and states over the seven-month implementation period in FY26. The firm suggests that the conversion of the GST Cess into standard GST revenue may offset the impact by FY27, with no lasting fiscal damage expected.
From a monetary policy perspective, the disinflationary effect of the GST cuts has raised expectations of a potential 25 bps rate cut by the Reserve Bank of India (RBI) in its upcoming meeting. Some analysts even suggest an outside chance of a 50 bps reduction, depending on the pace of pass-through to consumer prices.
ICRA noted that the GST rationalisation is timely, especially amid evolving global trade tensions and tariff pressures. The move is expected to boost consumer sentiment and support domestic demand, particularly in sectors such as automobiles, cement, and consumer durables.
SBI’s Chief Economist Soumya Kanti Ghosh echoed similar views, stating that the revenue loss is manageable and could be offset by funds from the compensation cess pool. He estimates CPI inflation could fall by 25–45 bps, depending on the extent of price pass-through by producers.
Overall, the GST rate cut is seen as a calculated fiscal stimulus aimed at empowering consumers, supporting growth, and maintaining macroeconomic stability. While short-term fiscal pressures are anticipated, the broader economic outlook remains positive, with analysts expecting a boost to GDP growth and improved monetary flexibility for the RBI.
