GST Reforms: Nomura Retains India's GDP Growth Forecast At 6.2%, Inflation At 2.7% For FY26

Nomura retained its growth and inflation forecast for the financial year 2026. The brokerage has pegged growth at 6.2% and consumer price-based inflation at 2.7%. In long-pending step, the Government of India is set to rationalise the GST rates. The four existing slabs of 5%, 12%, 18%, and 28% will be reduced to two slabs of 5% and 28%.

The centre has also proposed to introduce a 40% slab for sin and luxury goods. In theory, removing 12% and 18% tax slab would lead to a loss of 0.19% of the GDP growth. However, in practice, states will resist a change which will lead to revenue loss without a compensation.

Now, this hints at the fact that GST rates will be rationalised keeping high-revenue generating goods and services in the higher slab. Jobs and income prospects remain more fundamental drive of consumption. Higher disposable income due to tax reform may lead to more savings. Meanwhile, tariffs have weakened the export prospects, which is why Nomura is retaining its growth outlook.

Higher price elasticity of demand in low-cost goods will increase the volume. Meanwhile, there will likely be an initial decline on demand for other consumption goods for expected tax reduction, which will be followed by a demand boom in October and November, Nomura said.

India's 22% CPI basket is under the tax slab of 12% and 5% is under the 28%. Therefore, GST cuts will be highly disinflationary, Nomura said. However, in practice, prices resist go downwards. In 2017, it was seen that firms tend to mark-up prices in run up to any GST changes and then pass on smaller share of the benefit to the consumers to increase their profit margin, Nomura explained.

Now, decisions on GST are taken jointly by centre and states. A meeting of Group of Minister is scheduled this week which will be followed by GST Council meeting in the second half of the September, which will pave the way for its implementation by Diwali in case the consensus is met.

Governments derived most of its indirect tax revenue from goods and services below 18% slab which remained unscathed. As Nomura is expecting high-revenue-generating goods and services will remain under the high slab and compensation cess will be replaced with new cess, it has kept its fiscal deficit forecast unchanged at 4.4% of GDP.