Reduced tax rates usually bring big smiles all around, as have the reduction of the Goods and Services Tax (GST) rates announced on September 3. But behind the smiles of the people, stands the great growth gamble of the Indian government. Lowering corporate tax rates, stepping up government spending on infrastructure and other incentive schemes have not triggered private investment in India in the past few years. Changing track, the government has unleashed a big demand push by lowering both direct and indirect taxes. In doing so, it has taken a substantial hit on the revenue side, endangering the fiscal health of the budget. This means that, if its calculations on triggering growth go wrong, India might have to borrow to make up for the tax-cut related revenues lost, derailing the fiscal consolidation journey. In a global environment that is so fraught with risk, aggression, and unhinged actions, India’s best bet is to do what is needed to trigger domestic growth. The government has taken a bold gamble on growth; the Reserve Bank of India now needs to step in with a giant rate cut. And analysts should let go of the deficit number fixation.
A quick update on the GST system of India. Sixteen state and Union indirect taxes were subsumed into the GST in 2017, marking a huge step forward on the reform journey. The GST rates are decided by the GST Council that is chaired by the Union finance minister and has representation from each state government. The rates and GST structure are a joint decision taken by the Union government and the states. India had progressively built the GST system, with luxury goods attracting higher rates of GST and goods of mass consumption lower rates. The new rate structure announced earlier this month, has gone from a four-rate structure to an effective three-rate structure of 5%, 18%, and 40%.
The government is looking at a net loss in revenue of ₹48,000 crore due to the GST rate cuts. This is the second big step this year taken by the government to boost consumption. Earlier this year, Budget 2025 made incomes up to ₹12 lakh a year tax-free, leaving around ₹1 lakh crore more in the hands of the lower-middle and middle-middle class Indians. These two big tax cuts, both direct and indirect, add up to just over 3% of the FY25 revised budget. A hole that big would mean more borrowing and, therefore, a strain on the fiscal health with a rising fiscal deficit. But the government is gambling on economic growth to trigger the economy with a demand push that will see increased economic activity, which results in higher tax collections on both direct and indirect taxes, more than making good the loss.
In fact, the budget numbers assume personal income tax revenues to grow by a little over ₹1.81 lakh crore in this financial year. This means a real growth of ₹2.81 lakh crore if we take into account the ₹1 lakh crore lost in tax breaks given. That is an ambitious target for the current year.
{{/usCountry}}In fact, the budget numbers assume personal income tax revenues to grow by a little over ₹1.81 lakh crore in this financial year. This means a real growth of ₹2.81 lakh crore if we take into account the ₹1 lakh crore lost in tax breaks given. That is an ambitious target for the current year.
{{/usCountry}}The government is doing something similar with the GST cuts — hoping that the price cuts translate into rising demand, that, in turn, kickstarts the private investment cycle. As incomes rise, people pay more tax, and as they buy more, they pay more GST.
The great growth gamble of the government needs a few follow up steps.
One, the transmission of the GST rate cuts to the consumer is key to this strategy. Will the GST rate cut go into the bottom line of firms or make things cheaper for citizens? The world saw the rise in profit margins post-Covid as firms indulged in what was called greed-flation. Private firms will do what they can to boost profits; the government will have to ensure that the GST reduction is passed on to the consumer if the great growth gamble has to pay off. Therefore, price hikes in the run up to September 22, when the new GST rates kick in, need to be monitored, as do prices post the reduction of rates.
Two, RBI also has to step in with a bold rate cut in the next policy meeting at the end of September this year. RBI was too slow to cut rates in the past year, and the 100 basis point rate cut in 2025 should have begun in 2024. Inflation has been trending down this year and the July print reads 1.55% on the consumer price index. Year-on-year food inflation for the month of July 2025 is negative at -1.76%, the lowest after January 2019. The return of inflation is a worry we should keep for a time when the current crisis has blown over. Monetary policy must keep step with fiscal policy and the rate cut support will add to the growth momentum.
Three, the government should let go of the self-fixed fiscal deficit (the excess of government spending over revenue) target of 4.4% for this year, down from 4.8% last year. When India’s external sector is so fraught with risk and unhinged geopolitics, we need to do what it takes to trigger domestic demand and get growth on a sustained above 7% a year mark. And if this means letting go of the target for a couple of years, we should do it. It is not as if the global rating agencies will move the needle on our fiscal prudence, driven as they are by geopolitical equations.
Tax and interest rate cuts will go some distance in a dhakka (push)-start move to nudge the economy to over 7% GDP growth. But, to sustain it we need process reforms, removal of inspector raj and a better urban experience to encourage people to leave the free-food freebies to migrate to urban centres for jobs and livelihoods. What can you do to help? Spend a lot this festive season and give generous bonuses to your domestic workers so they can spend.
Monika Halan is the best-selling author of the Let’s Talk series of books on money. The views expressed are personal