Blitz Bureau
NEW DELHI: The sweeping reduction in Goods and Services Tax (GST) rates, which came into effect on September 22, as per the decisions taken at the 56th meeting of the GST Council held in New Delhi on September 3, is expected to reshape India’s near-term inflation trajectory.
Economists broadly agree that the changes, which rationalise the complex tax structure into fewer slabs and cut rates on hundreds of household goods, will lower the cost of living. It is estimated that the rate cuts may lower headline inflation by anything between 40 basis points and one percentage point in the coming months.
Headline inflation measures the overall rise in the consumer price index (CPI), which includes all categories of goods and services in the consumption basket — from food, fuel, and housing to clothing, transport, and recreation. It tells the full story of what consumers pay at the market.
Garima Kapoor, Vice-President, Kotak Investment Banking, estimates that if the entire benefit of lower tax rates is passed on to consumers, “headline CPI inflation could come down by nearly 100 basis points over a year.” This would be a significant moderation, considering that retail inflation stood at 7.2 per cent in August.
CareEdge’s chief economist Rajani Sinha is more cautious, projecting a decline of “70 to 90 basis points on an annualised basis,” while Bank of Baroda expects the relief to be around 40 basis points.
Sinha stresses that the impact hinges on how quickly businesses pass on the tax benefit. “The GST cuts will only soften headline inflation if producers and retailers reduce prices in line with lower taxes. Any delay or partial pass-through will dilute the impact,” she explains.
The experience of previous tax tweaks supports this caution. When GST was first rolled out in July 2017, studies found only a modest and short-lived impact on inflation because many goods in the CPI basket were already exempt or taxed at low rates.
This time, however, the coverage is broader. From packaged foods to small appliances, personal care products, and some categories of automobiles, a wide swathe of consumption items are being repriced lower. That means the impact on headline inflation is likely to be more immediate.
Economists at S&P Global note that “GST cuts will slow down the pace of inflation acceleration from October onward, keeping price rise within or near the Reserve Bank’s target range.” They add that the reform is coming at a critical juncture, when food inflation has been stubborn and threatens to spill over into other categories.
Still, there is broad agreement that the relief may be transitory. The cuts can produce a one-time downward shift in the price level, but they do not permanently change the trajectory of inflation.
As Garima Kapoor points out, “The moderation will show up most clearly in the first six to nine months as old inventories clear and new, lower-tax goods reach retail shelves. Beyond that, the path of inflation will once again depend on food and fuel shocks, global commodity prices, and the domestic demand cycle.”
Indeed, the structural drivers of inflation remain unchanged. India continues to be vulnerable to weather-driven food price spikes, especially in vegetables and proteins. Fuel prices are influenced by global oil markets, which remain volatile. These components have a heavy weight in the CPI basket and can easily swamp the benefit from indirect tax relief.
The Reserve Bank of India, which targets inflation at 4 per cent with a tolerance band of 2 per cent to 6 per cent, has indicated it will “look through” temporary factors and keep monetary policy focused on medium-term stability.
Historical experience backs this expectation of a short-lived benefit. A National Institute of Public Finance and Policy paper reviewing GST’s introduction in 2017 found that while retail food prices rose modestly in the transition, the overall effect on inflation dissipated within a year.
International cases show similar patterns. When Australia and New Zealand introduced GST decades ago, headline inflation spiked briefly but then normalised as the tax base broadened and efficiency gains filtered through. In India’s present case, the reform is expected to push inflation downward, but again in a temporary manner.
SBI Research has gone further, predicting that headline inflation could fall to just above 1 per cent in October, a two-decade low, once the full effect of GST rationalisation is captured.
Such a steep fall, however, assumes unusually smooth pass-through, as well as benign conditions in food and fuel prices. Many economists doubt this scenario will hold. As Sinha of CareEdge observes, “Headline inflation is influenced by too many moving parts. GST will help, but it is not a magic bullet.”
The battle against inflation will still depend on how India manages food supplies, energy costs, and global shocks. The GST cuts may buy policy makers some breathing space, but they are no substitute for deeper structural fixes to tame inflation on an enduring basis.