Economists bet proposed GST cuts can counter Trump tariffs and drive consumption, lifting GDP by half a percent

GST cut will help counter some part of the downside risk from the tariff on growth, but it will not fully balance it, experts say.

The proposed reduction in tax rates on several items, set to be taken up by the GST Council in early September, is likely to boost to consumption, thereby uplifting India’s GDP growth by 0.3-0.5 bps this financial year, several economists have told Moneycontrol.

Experts said the GDP growth for FY26 may come in at 6.5 percent or slightly higher, helped by the Centre’s rate rationalisation efforts, at a time when the economy is facing downside risks to growth posed by Trump’s tariffs on Indian exports, effective August 27.

The GDP data for Q1FY26 will be closely tracked to assess the extent of slowdown in growth rate, with a Moneycontrol Poll of 15 economists pegging a likely moderation to 6.6 percent compared to 7.4 percent in Q4FY25.

Earlier in August, a Group of Ministers of the GST Council had approved a two-rate structure, moving 90 percent of items of the 12 and 28 percent slabs to 5 and 18 percent slabs, respectively. The GST Council is expected to take a final call on the two slabs when it meets in New Delhi in the first week of September.

"Lowering GST rates on essential goods and consumer durables would reduce prices, and stimulate consumption, which is critical when external demand is weakening," said Arun Singh, global chief economist, Dun & Bradstreet, but added that the relief can’t fully compensate for the impact of higher tariffs on growth.

India Ratings and Research (Ind-Ra) has projected private final consumption expenditure (PFCE) – an indicator of spending by households – to grow at 6.9 percent in FY26, about 40 bps more than the overall growth projection. PFCE’s share in GDP is 52-53 percent.

"The implementation of GST cuts would be the key for PFCE to grow at 6.9 percent," noted Paras Jasrai, Senior Economic Analyst, Ind-Ra. "The PFCE would be getting some support (further) from the cuts but considering the unprecedented uncertainty, we think that it will grow at 6.9 percent."

Acuite Ratings and Research has pegged the PFCE growth without a GST-rate cut pass through at 6.8-7 percent, but if  cuts are in effect from September, the PFCE might grow between 7-7.4 percent.

Gaura Sen Gupta, chief economist, IDFC FIRST Bank said that GST cuts will help counter some of the downside risk from Trump’s tariff on growth, but it may not fully balance it out. "On paper, the tariffs can negatively growth by 0.4 percentage points (or 40 bps) if 50% tariff persists till March 2026. Rate cuts, if implemented on time may boost growth by 30 bps," she said.

Pace of GST-cuts pass-on key

Officials have said that the GST rate cuts – once approved by the Council – may come in effect from the fourth week of September, but the boost to consumption may depend on the pace of its pass-through to consumers, which may take a while, experts have said.

"Once the new rates are notified, businesses are generally expected to pass on the benefits to consumers promptly. That said, the actual pace of transmission may vary. Larger companies and organized sectors with efficient systems may adjust pricing quickly, whereas smaller enterprises or those with complex supply chains and slower inventory cycles may require more time to assess the impact and implement changes," said Pratik Jain, Partner, Price Waterhouse & Co.

“Additionally, compliance requirements such as product labelling, packaging updates, and system recalibrations will also need to be factored in, potentially affecting the speed of rollout to the customers," Pratik Jain added.

Bipin Sapra, Partner, EY India, however, said that the high-value product manufacturers, those of automobiles, tractors, may have to incur some loss in margins on existing stocks. "But they are the ones who will implement the cuts immediately, otherwise their stock will remain unsold," he added.

"Products which are of high-value, the pass on will have be immediate, even if they have to incur a loss (on margins) on current stock," EY India’s Sapra said, adding that FMCG companies may take a month to pass-on the rate cuts to retail prices.

Sources also said that the GST anti-profiteering framework might be reintroduced in a limited capacity after the GST cuts are notified, to ensure timely and fair transmission of tax benefits.