GST revamp to add 30 bps to growth, say economists

India's economic growth is set to get a 20-30 basis point boost from the goods and services tax rationalisation announced on Wednesday, economists said.

The GST structure has been simplified into two slabs, with items taxed at 5% and 18%, down from four earlier, as the 12% and 28% rates have been scrapped.

Experts believe the simpler structure will strengthen consumption, support small and medium enterprises, and enhance resilience against global challenges.


"The reform is likely to spur consumption and in turn domestic growth, critical at a time when the domestic economy is facing external headwinds," said Yuvika Singhal, economist at QuantEco Research.

The relief comes even as India faces a 50% tariff by the US, including a 25% penalty on imports of Russian oil.

QuantEco Research estimates that GST rationalisation could add 0.2-0.3% to FY26 growth, in line with HDFC Bank's forecast of 0.2%.

The GST cuts have significantly reduced the burden on consumers, with essential items such as shampoo, cream, and kitchenware now taxed at 5%, while electronics have fallen to 18% from 28%.

Economists said the middle class will gain significantly from the rate cuts that take effect from September 22.

"Given its wider outreach, GST rate reduction would impart a higher multiplier effect on GDP growth than direct tax cuts, likely to be amplified by the onset of the festive season," said Singhal.

As per private consumption patterns, non-durable goods like food and beverages account for 24% of GDP, durable and semi-durables for 5.9%, and services for 30%.

"The GST rationalisation is timely as it comes just when the festive season has started and there is need for a boost," said Madan Sabnavis, chief economist, Bank of Baroda. "When combined with income tax cuts this is really useful. It will also help lower input costs for producers, offsetting to a limited extent the tariff impact on small and medium enterprises," he added.

Economists noted that the GST revamp, alongside income tax reliefs announced in the February budget, easing inflation, interest rate cuts, and a strong monsoon supporting rural incomes, sets the stage for a robust consumption recovery.