GST reform to stimulate consumption but may reduce government's revenue: Moody's

The rating agency said that the loss of revenue due to the rate rejig will likely be higher than what the government has estimated, with a more pronounced strain in coming years.

The recent goods and services tax reform will likely stimulate domestic consumption but could erode government's 'revenue buoyancy', Moody's Ratings said on September 9, however, the forgone revenue may not derail the trend of fiscal consolidation.

Centre has estimated a net foregone revenue of Rs 48,000 crore ($5.4 billion) this year, based on calculations using data from FY24.

The note said that the Centre may slow down some of the government spending over the next two quarters, which may preserve the trend of fiscal consolidation. Aside of that, the GST reform may also impact the government's efforts to reduce debt.

"...India continues to have the weakest debt affordability among investment-grade sovereigns, with interest payments amounting to about 23 percent of general government revenue in fiscal 2024-25," added Moody's.

The rating agency said that the loss of revenue due to the rate rejig will likely be higher than what the government has estimated, with a more pronounced strain in coming years.

"Given the government's use of revenue-eroding measures to support growth over the past year, we do not expect significant revenue-enhancing measures over the remainder of its term. This, in turn, preempts material gains in debt reduction or improvements in debt affordability," Moody's said.

However, the drop in effective GST rates could end up boosting private consumption and thus support economic growth.

"The GST reform is another form of fiscal policy support for households, complementing the higher income tax thresholds introduced in February that effectively exempted many middle-income households from paying income taxes and lowered income tax payments for others. Both measures aim to boost household consumption, which accounts for about 61 per cent of GDP," the Moody's note said.

The GST Council had last week tweaked the structure to a two-slab rate of 5% and 18%, along with a new GST rate of 40% on 'sin goods', all of which is set to take effect September 22.