The major reduction in the Goods and Services Tax (GST) rates announced on September 3 may boost the domestic demand and partly offset the drag from Trump's tariffs, while giving the Reserve Bank of India (RBI) more flexibility to extend its easing cycle in FY26, economists have said.
Aditi Nayar, chief economist at ICRA said lower indirect levies should boost consumer demand and improve sentiment for manufacturers. “The positive implications for domestic activity will help offset a portion of the negative impact of evolving US tariffs and penalties on GDP growth.”
That said, Nayar cautioned that the Centre and states will “have to make up forgone revenue through other channels or expenditure rationalisation.” She added that the tax reform could encourage fresh private capex in consumption-oriented industries. ICRA is holding on to its FY26 growth projection at 6.5 percent, though Nayar said any prolonged tariff escalation may warrant a review.
On September 3, the Centre cut the goods and services tax on small cars, televisions, air conditioners, textiles and a range of household goods, with effect from September 22 in a major rate overhaul ahead of the festive season.
Addressing media after the GST Council meeting, Finance Minister Nirmala Sitharaman said the changes were brought about keeping the interests of the common man and the middle class in mind. "Items on which GST has been reduced to 5 percent — hair oil, toilet soap, soap bars, shampoos, toothbrushes, toothpaste, bicycles, tableware, kitchenware, and other household articles."
Gaura SenGupta, chief economist at IDFC First Bank quantified the likely macro boost, estimated at 0.6 percent to GDP over a 12-month period, though a 50 percent US tariff can cloud the external outlook. “For now, we retain our 6.6% FY26 growth forecast,” Sengupta said.
Union Bank of India’s chief economic advisor Kanika Pasricha signalled she is holding on to the call of “token 25-50 bps rate cuts in H2FY26, the final leg of the policy easing cycle,” she said. Pasricha argued that inflation numbers are “already trailing MPC projections for the coming quarters by 30-50 bps, excluding the GST effect,” and pointed to a softening of growth pulse “after a front-loaded first quarter.”
Experts believe the GST reform will act as a cushion against tariff-related uncertainties, and should the US levies ease, the combined tailwind along with Centre's fiscal support and easier monetary conditions could lift confidence across manufacturing supply chains.
Experts added that RBI's monetary policy committee should see an improvement in the consumption pattern after these reforms, based on which decision on a rate decision may be made.
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