Southern states to gain most from GST cuts

Southern states stand to gain the most from the recent GST rate cuts, with Kerala, Tamil Nadu, Andhra Pradesh, Telangana and Karnataka likely to see the sharpest decline in consumer inflation if producers pass on the complete benefits to households.

State-level analysis indicates that Kerala’s CPI could slow by as much as 1.37 percentage points in both rural and urban areas. Tamil Nadu, Andhra Pradesh, Telangana and Karnataka are also expected to see reductions of over 1 percentage point. By contrast, Uttar Pradesh, the country’s most populous state, is likely to witness only a 0.86 percentage point decline in rural inflation and a 0.82 point drop in urban areas, reflecting the higher weight of food in its consumption basket, where GST cuts have limited impact.

In August, Kerala’s rural inflation of 10 percent could have dropped to 8.4 percent after factoring in the GST cut, while urban inflation would have eased from 7.2 percent to 5.8 percent. West Bengal’s rural inflation would have turned negative at –0.28 percent instead of 0.75 percent, while its urban print would still remain relatively elevated at 2.44 percent, down from 3.4 percent.

Bihar, Odisha, Jharkhand and Rajasthan are also among the smaller beneficiaries, with GST’s inflation impact ranging between 0.75 and 0.99 percentage points. States with more diversified consumption baskets and higher weights of non-food categories, such as Delhi, Punjab and Maharashtra, stand in the middle, seeing moderate relief.

The southern states’ advantage stems from their lower reliance on cereals and primary food items. For example, Kerala’s rural food and beverages basket is just 44 percent of CPI, compared with nearly 54 percent in Uttar Pradesh and 61 percent in Bihar. Cereals make up 17 percent of Bihar’s rural consumption, but less than 7 percent in Kerala. Vegetables account for nearly 10 percent in Bihar’s rural areas but only 4 percent in Kerala.

The GST cuts have also been amplified by Kerala’s unusually high inflation rates—over 9 percent in August. Bihar, in contrast, has swung from topping the charts with 7.8 percent inflation in October 2024 to recording just 0.5 percent in August, well below the national average of 2.07 percent.

Overall, economists expect the new two-rate GST structure—effective September 22—to trim India’s headline inflation by nearly 1 percentage point in the case of a full pass-through.

“We estimate that the tax rate cuts can lower headline CPI inflation by 1 percentage point if producers pass on all benefits to consumers. If the pass-through is only partial, the fall could be closer to 0.5 ppt,” HSBC economists said in a note on September 4.

The OECD projected on September 23 that India’s FY26 inflation would stay below 3 percent, aided by GST cuts and income tax relief, while lifting its growth forecast to 6.7 percent from 6.3 percent previously.

Lower inflation is expected to provide the RBI room to cut rates one more time this year, economists contend.

The central bank’s monetary policy committee is due to meet next week to decide on the policy rate, which stands a percentage point lower than at the start of the year.