GST 2.0 and consumption-led growth: India has chosen the sugar rush over stamina. The new GST rationalisation — collapsing four slabs into 5% and 18%, with a 40% demerit rate and deep cuts on hundreds of mass-market items — promises cheaper everyday goods and a festive lift to sentiment from September 22. The arithmetic is straightforward: a near-term bump to private consumption, a modest nudge to inflation, and a rally in consumer stocks. The economics is not: a strategy centred on tax-induced consumption will not sustain high growth unless it is matched by investment, productivity, and export dynamism. Recent data and official assessments underline why.
Rate cuts can buoy demand for a quarter or two. Broker and bank research already predicts a consumption impulse; SBI Research, for instance, estimates a sizeable boost but flags a recurring revenue hit. Markets have cheered, and surveys point to stronger festival spending. Yet the same logic that delivers a quick lift makes the effect evanescent: once prices re-set and purchases are front-loaded, growth reverts to trend unless capacity, productivity, and incomes rise. Private consumption did strengthen through FY2024-25, but investment momentum was uneven, and official forecasters continue to warn against relying on demand alone.
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GST 2.0: The fiscal trade-off is real
Consumption-heavy tax cuts are not free. The Centre and states together face revenue foregone running into tens of thousands of crores. The government expects the loss to be smaller than some estimates, but even the lower bound tightens fiscal space precisely when public capex must crowd-in private investment. GST collections have been buoyant—₹22.08 lakh crore in 2024–25 and nearly 10% higher so far this fiscal—but the redesign will test that buoyancy. A structurally smaller GST take leaves fewer rupees for roads, rail, power grids, and human capital, the very levers that raise potential growth.
Tax-led consumption tends to spill over into import-intensive categories: consumer electronics, small appliances, even parts of automobiles. Despite production-linked incentives, India’s electronics ecosystem still depends heavily on imported components; electronics imports topped $20 billion for the June 2024 quarter, with China and Hong Kong supplying over half. An across-the-board GST cut on durables risks boosting demand that leaks abroad rather than multiplying within domestic supply chains. Without complementary policies that deepen local value addition, the current account bears the burden while domestic manufacturing gets only a fraction of the impulse.
Investment, not indulgence, drives growth
Every credible assessment says the same thing: India reaches and sustains 7–8% only if private investment rises and productivity reforms bite. The IMF’s 2025 Article IV report notes that private investment “has not yet risen markedly” and presses for factor- and product-market reforms, regulatory simplification, and greater openness to trade and FDI. Official national accounts show PFCE rising in FY2024-25, but GFCF’s pace is what lifts capacity and jobs; MoSPI’s latest prints show solid but not spectacular investment growth. Moving from a capex-led to a consumption-led stance, as some analysts characterise the GST shift, risks easing the very pressure needed to unlock the next leg of the capex cycle.
GST’s strength is its credit chain and a broad base; its weakness is political economy. Large rate cuts widen the gap between headline rates and the revenue-neutral rate and complicate state finances—many of which already lean on GST compensation cess and volatile own-tax revenues. NIPFP’s recent work on GST revenue performance underscores the delicate balance between buoyancy and design. If cuts are financed by a future return to ad hoc cesses, inverted duty structures, or compliance laxity, the reform will have undermined itself.
Lower indirect taxes are often sold as pro-poor. The evidence is mixed. Consumption taxes are, by construction, less progressive than direct taxes; the immediate beneficiaries of cuts on premium FMCG, appliances, or apparel are more urban and formal-sector households. Yes, removing GST on individual health and life insurance helps widen protection, but the bigger welfare gains still come from steady wages and jobs created by investment and export growth. A consumption push without parallel job and productivity gains risks deepening the K-shape: brisk urban, formal consumption and a slower recovery in informal and rural incomes.
Need a durable growth strategy
A tax-induced consumption bump is harmless if it is a bridge to investment and trade competitiveness. It is harmful if it becomes the growth model. The forward path should be anchored in five course-corrections:
First, ring-fence public capex. Whatever the revenue impact from GST 2.0, capital expenditure budgets—Union and states—must be protected. If needed, phase rate cuts over a longer glide path to avoid a sudden squeeze on infrastructure outlays that crowd-in private investment. IMF directors have, in any case, urged using today’s resilience to advance deeper reforms that lift potential growth.
Second, align GST 2.0 with domestic value addition. Where import intensity is high, pair lower GST on end-products with time-bound correction of inverted duty structures on components and sub-assemblies, so value accrues within India. Electronics is the test case. Evidence of persistent import dependence is clear; relief on the final good should be matched with tariff and logistics fixes that pull supply chains onshore.
Third, protect the base, simplify the chain. Keep the base broad; resist carve-outs that fracture input-tax credit flows. Use the redesign moment to accelerate e-invoicing coverage for SMEs, automate reconciliation, and reduce working-capital strain in refund cycles. Rate certainty plus frictionless credits are worth more to MSMEs than sporadic cuts on a few items.
Fourth, keep macroprudence in view. The latest national accounts show consumption holding up and investment improving but not decisively breaking out. Fiscal space is finite; the temptation to backfill revenue with cesses should be resisted. If nominal growth is moderating and corporate earnings are soft, as market data suggest, pushing demand through tax alone will not conjure capacity or competitiveness.
Fifth, pair GST 2.0 with a tradables push. The World Bank’s recent India work is unambiguous: to become a high-income economy in a generation, India must raise productivity, deepen human capital, and expand in global value chains. Tax policy should complement that aim—lower logistics costs, faster trade facilitation, predictable customs regimes, and stable, rules-based incentives.
A calibrated prescription
A sensible compromise is within reach. Let the September cuts proceed, but sequence and condition the next wave on demonstrable improvements in investment and value addition. Set a medium-term revenue anchor that preserves capex. Publish an annual “GST productivity scorecard” tracking buoyancy, compliance, refund timeliness, and inverted-duty correction.
Extend zero-rating to exports more seamlessly, and consider a roadmap—negotiated with states—for eventually bringing petroleum products into GST at a revenue-neutral rate, which would materially reduce cascading and logistics costs. Above all, tie tax policy to a clear statement of industrial strategy: the goal is not to sell more TVs this quarter; it is to build the factories, ports, and skills that will sell more to the world over decades.
Growth based on cheaper consumption will flicker. Growth based on investment, productivity, and trade will endure. GST 2.0 can still be the latter—if policy makers resist the quick applause and choose the harder, better path.