GST Rate Cuts To Lower India's Retail Inflation By One Percentage Point: Economists

The GST rate rationalisation is expected to lower inflation in the economy and also provide a boost to disposable income and savings for the common man. Economists believe India's retail inflation is likely to edge lower by one percentage point as a result of the GST rate cuts.

GST Council this week approved the most comprehensive overhaul of India’s consumption tax system since its introduction in 2017. The landmark reform will impact everything from toothpaste and insurance premiums to tractors, cement, and shampoos once they come into effect later this month.

The proposals include shifting several items from the higher 12% and 18% GST slabs to the 5% slab or even to the Nil GST category, which means complete exemption. Among the items proposed to be fully exempt from GST are commonly consumed food items such as loose paneer, khakhra, pizza bread, chapati, and roti, all of which currently attract 5% to 18% GST.

The rate rationalisation should have a large impact on CPI inflation going forward given reduction in motor vehicles, processed foods, personal and household goods and items of clothing and footwear among others, according to economists at ICICI bank.

"The overall impact on CPI in-case of pass-through of lower prices is around 110-120 basis points which is higher than our earlier estimate since the reduction is quite broad-based for personal and household goods along with few services", said Sameer Narang, chief economist at ICICI bank.

Pranjul Bhandari, chief economist at HSBC also estimates retail inflation to fall by one percentage point if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5 percentage point, as per Bhandari's estimates.

More importantly, cess amount has been completely taken out except for tobacco products which should lead to consumer savings, Narang added.

Apart from lowering inflation, GST rationalisation is expected to boost consumption and provide a leg up to private consumption. On the fiscal side, the gains to Indian consumers might just be the government's loss in terms of tax collections, which are already seen to be on a weak footing.

However, economists expect any slippage on the fiscal deficit to be unlikely. Potential revenue loss could be offset by chances of higher dividends from PSUs, higher dividends from the Reserve Bank of India, and hike in excise duty on diesel and petrol, along with chances of marginal trimming to the capex target.

The inflation outlook for 2025-26 is already more benign than previously expected. Large favourable base effects, steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation.

Retail inflation for FY26 is currently projected at 3.1% by the central bank, seeing an uptick from Q4FY26 onwards. The decline in inflation could also create space for more rate cuts. "We expect the RBI to cut rates once again by 25 basis points in 4Q25, taking the repo rate to 5.25%," Bhandari stated in a note on Thursday.