[Answered] The new GST rate cuts aim to boost consumption amid export challenges. Critically analyze the potential of this policy to stimulate economic growth and its implications for fiscal revenue.

Introduction

India’s domestic consumption contributes nearly 60% of GDP (World Bank, 2024). In September 2025, sweeping GST rate cuts were announced to stimulate demand, strengthen purchasing power, and offset sluggish exports and private investment.

Potential of GST Rate Cuts to Stimulate Growth

1. Boost to Consumption Demand: Lower indirect tax burden → higher disposable income → potential multiplier effect on aggregate demand. Budget 2025 income-tax cuts + GST cuts create a combined stimulus package. Example: FMCG, textiles, and white goods sectors expected to benefit, spurring rural and urban demand.
2. Correcting Structural Anomalies: Removal of inverted duty structures reduces cost distortions for manufacturers, especially in textiles, footwear, and electronics. Simplification enhances compliance and lowers litigation.
3. Encouragement for Formalisation: GST rationalisation incentivises smaller firms to join the formal tax net. According to RBI’s Annual Report (2024), GST revenues have improved tax buoyancy despite global headwinds.
4. Counter-Cyclical Policy Tool: With merchandise exports declining (-4.2% YoY in 2024-25) due to weak global demand, boosting domestic consumption acts as an internal growth engine. Keynesian economics: fiscal stimulus through tax cuts can revive aggregate demand in slowdown periods.
5. Comparative Global Practices: UK (2008 crisis) and Japan (2014 slump) reduced VAT rates temporarily to counter falling demand. Evidence shows short-term consumption spikes, though sustainability varies.

Challenges and Fiscal Implications

1. Revenue Loss for Centre & States: Government estimates ₹48,000 crore annual impact (based on 2023-24 consumption), but likely understated. Loss of compensation cess strains State finances; dependency shifts to the 16th Finance Commission.
2. Risk of Fiscal Slippage: India’s fiscal deficit target: 5.1% of GDP (Budget 2025-26). Revenue foregone may push deficit higher unless offset by buoyancy or expenditure cuts.
3. Unequal Benefits Across Sectors: While middle-class consumption may rise, luxury items (e.g., high-end motorcycles, apparel) see higher GST. Raises concern over whether demand stimulus is inclusive across income groups.
4. Need for Anti-Profiteering Mechanism: Without effective monitoring, firms may not pass on tax cuts to consumers. Reviving National Anti-Profiteering Authority could ensure benefits reach end-users.
5. Limited Multiplier Without Supply-Side Support: Tax cuts alone insufficient if investment sentiment, job creation, and credit flow remain weak. Economic Survey 2024-25: sustainable growth requires synergy between demand-side stimulus and structural reforms.

Way Forward

1. States should diversify revenue sources (e.g., property tax, excise on luxury goods).
2. Targeted GST reductions in labour-intensive sectors can simultaneously boost demand and employment.
3. Pair tax cuts with infrastructure spending, skilling programmes, and MSME support to magnify multiplier effects.
4. Transparent Centre-State coordination critical under the GST Council framework to avoid fiscal stress.

Conclusion

As Keynes emphasized, demand management is vital in downturns. GST rate cuts may revive consumption, but balanced fiscal prudence and structural reforms ensure sustained, inclusive growth.