GST Reforms: Is Third Time The Charm for the Indian government?
Since 2019, Prime Minister Narendra Modi’s government has cut taxes thrice to push demand, investment and growth, sacrificing revenue in the process.
In September 2019, the corporation tax rate was cut to unlock manufacturing investment and capital expenditure by industry. In February 2025, personal income tax rates were rejigged to revive consumption and, by extension, private investment. With the latest cut—in goods and services tax (GST) rates—the Centre is once again hoping to spur consumption and counter the impact of punitive 50% tariffs imposed by the US.
The pattern is unmistakable: twice the state has cut taxes on income—first for companies, then for individuals—in the belief that more cash-in-hand will lead to spending and, eventually, new industrial capacity, jobs and growth.
The clean-up of the eight-year-old GST is the latest gambit, aiming to change consumer behaviour, not by adding money to wallets, but through lower prices on shop shelves. It is a cleaner, more powerful political decision, but would translate into economic results only if the cuts influence consumption.
The 2019 tax cut for companies did not yield the expected results, in part because Covid-19 shut down the economy just months later. The jury is out on the impact of the personal income tax relief given this February. Will consumers take the bait after the GST rate rationalisation? That is a key question our cover story attempts to answer.
As Surabhi writes, the net fiscal impact of the latest move is an expected shortfall of rS 48,000 crore for the exchequer. The moot question she raises is: will Indians choose to save the money likely to accrue in their wallets or spend more? This is an important point to raise in light of the limited impact of the corporate tax cut.
Noted economist M. Govinda Rao says the GST reforms are important, but sounds a note of caution that while the cuts may boost consumption, several items are price inelastic, and thus may not see a boost in demand.
This is why the new wager is trickier because indirect tax cuts do not add cash to household balances. There is no savings dividend to redeploy; unless wages grow and consumers feel good about spending more.
Having twice bet on income tax changes, the Centre is hoping now that indirect tax cuts will do the heavy lifting. Will the revenue foregone be worth it? Several Opposition-ruled states have publicly expressed concerns and have sought assurances from the Centre to shield against potential shortfall in revenue.
Hopefully, this latest move will trigger a virtuous cycle with the fall in prices triggering greater spending, and the resulting higher volumes leading to increased corporate investments rather than just higher profitability. Else, the cut could raise concerns over fiscal drift in state budgets, and narrow the room for future policy choices to spur growth.
The bottom line is this: consumers and companies both need to vote with their wallets. @szarabi
