GST reforms to boost consumption but limit fiscal consolidation: Moody's

Moody's says GST rate cuts will boost consumption and ease inflation but warns of higher revenue loss, fiscal strain, and weak debt affordability for India

The decline in India’s effective goods and services tax (GST) rates is expected to boost private consumption, but the resulting loss of tax revenue could limit progress in fiscal consolidation and debt reduction. Moody’s said the revenue forgone is likely to exceed government estimates in a report released on Tuesday.

 

On September 3, the government announced an overhaul of the GST framework — the most significant reform to the tax system since its 2017 inception — reducing GST tiers from four to two main rates. The reforms will take effect from September 22.

 

“We expect that the tax savings from the GST revisions will be largely passed on to consumers through lower prices, strengthening private consumption, which recorded a strong quarter-on-quarter increase in real terms in the three months through June 2025,” Moody’s said. It added, “Lower prices will also help keep inflation at bay.”

 

The rating agency said that given the economy’s expansion over the past two years and a larger volume of goods now subject to GST, forgone revenue is likely to exceed government estimates. The government currently estimates total revenue forgone at around ₹480 billion ($5.4 billion).

 

“The strain will be even more pronounced in the coming years because the new tax structure will be effective over a full year, rather than the remaining six months of the current financial year,” Moody’s said.

 

In its sector report, Moody’s said that amid external pressures from higher US tariffs, the simplification and rationalisation of tax rates are likely to support economic growth.

 

It added that government spending growth is expected to slow over the next two quarters to preserve the fiscal consolidation trend. Noting the government’s “revenue-eroding” measures to support growth, Moody’s said it did not expect substantial revenue-enhancing measures for the remainder of the current term.

 

“Reflecting its high level of general government debt, India continues to have the weakest debt affordability among investment-grade sovereigns, with interest payments amounting to about 23 per cent of general government revenue in 2024-25,” Moody’s said.