GST cuts will impact nearly 14% of inflation basket, essential and household goods to benefit the most

GST cuts to help cool inflation further

India’s inflation is expected to ease further as the goods and services tax (GST) rationalisation feeds into consumer prices, with the cuts impacting nearly a seventh or 14 percent of the CPI basket, a Moneycontrol analysis shows.

The cuts, effective September 22, will lower rates on essentials such as butter, ghee and paneer, as well as household goods like soap, hair oil, shampoo and conditioners. Fruit juices, too, will get cheaper. Non-alcoholic beverages now face a 40% levy, compared with 18 percent earlier.

If producers pass on the benefits, 13 percent of CPI-tracked goods and services could see relief. These categories had been recording faster price increases: inflation in these items rose to a nine-month high of 3.6 percent in July, compared with 3.3 percent in June. In contrast, headline retail inflation fell to an eight-year low of 1.6 percent in July, down from 2.1 percent the month before.

The biggest beneficiaries will be in discretionary consumption. Biscuits, chocolates, ice creams, sweets and beautician services now attract a 5 percent rate, down from 18 percent. Motorcycles will be cheaper as levies fall from 28 percent to 18 percent. Even bidi smokers will see a lower tax incidence, cut by 10 percentage points to 18 percent.

For household budgets, the biggest gains will accrue in daily consumables, where rates are down to 5 percent from 12 percent. This covers a broad core goods segment—accounting for over a quarter of items, or about 6 percent of the inflation basket. Core goods make up 21.9 percent of the CPI basket overall.

In household electronics, like ACs and TVs, the rates now stand 10 percentage points lower at 18 percent.

Food and beverages will see fewer changes, with 9 percent of items impacted. In services, about 12 percent of categories will benefit. Still, the relief could be significant: butter inflation stood at 5.7 percent in July, jams and jellies at 4.4 percent, carpets at 17 percent, and toilet soap, lotions and hair oil closer to 5 percent.

Economists expect the GST rationalisation to lower CPI inflation at least 50 bps or 0.5 percentage points.

“We estimate that the tax rate cuts can lower headline CPI inflation by c1ppt if producers pass on all benefits to consumers. If the pass-through is only partial, the inflation fall could be closer to 0.5ppt. We expect the RBI to cut rates once again by 25bp in 4Q25, taking the repo rate to 5.25%,” said HSBC economists in a note on September 4.

Moneycontrol analysis shows that consumer thali would have been 0.7 percentage point cheaper in July with revised prices. On the other hand, core inflation would have been down by 1.5 percentage points and services down by 1 percentage point.

The broader question is how quickly the relief will reflect in household budgets.