Moderate impact of GST cuts on fiscal deficit; inflation may lower 50-90bps

Besides, a cut in the tax rate on nearly one-fourth of the essential and household items contained in inflation basket may lead to a moderation of 50-90 bps in retail inflation over next 12 months

Despite a potential net revenue loss of ₹48,000 crore to the government due to the goods and services tax (GST) rates rejig effective September 22, it may have a modest fiscal impact of 5-40 basis points (bps) in the current financial year (FY26) as it might trigger an increase in overall demand, leading to higher growth. This impact too can be absorbed if the Centre goes for a compression in the capex by a mere 5 per cent, reckon analysts.

 

Besides, the cut in the tax rate on nearly one-fourth of the essential and household items contained in the inflation basket may lead to a moderation of around 50-90 bps in retail inflation over the next 12 months.

 

In a statement on Thursday, asset management company (AMC) Bernstein said that the net impact on the central government’s fiscal deficit, assuming no capex adjustments, would be close to 20 bps. If capex is reduced by 5 per cent, the impact moderates to about 5 bps.

 

“In a more conservative scenario, where the Centre absorbs the full revenue loss (including that of the states) without any capex cuts, the headline impact on the fiscal deficit could widen to around 40 bps. Actual impact will be lower than that, given its applicability to only half of the year. In practical terms, however, some capex rationalisation is likely,” the Bernstein statement added.

 

In a note, SBI research, however, said that based on the trend growth and consumption boost, it expects almost minimal impact of ₹3,700 crore revenue loss, which will have “no impact” on fiscal deficit.

 

“The retail inflation may come down by 25-30 bps in the essential items category, considering a 60 per cent pass-through effect on food items. (Besides), rationalisation of GST on services may lead to another 40-45 bps reduction in retail inflation, considering a 50 per cent pass-through effect. Overall, we believe retail inflation may be moderated in the range of 65-75 bps over FY26-FY27,” it said. 

 

Further, ICICI Securities in a statement said that fiscal implication from lower taxes should be even lower than the indicated 20 bps of gross domestic product (GDP) in FY26.

 

“Bigger stimulus than earlier expected leads us to revise our GDP forecast higher for FY26 (to 6.7 per cent from 6.5 per cent), with inflation for the current financial year seen averaging closer to 2.5 per cent from just below 3 per cent earlier,” it added.

 

Echoing similar views, UTI AMC said that from a market perspective, the implications for bonds should remain limited as the estimated revenue loss can be comfortably absorbed within the existing budgetary expenditure.

 

“The disinflationary impact of GST cuts bodes well for monetary policy, and allows the Reserve Bank of India (RBI) to keep rates lower for an extended period,” it said.

 

Meanwhile, HSBC in a statement said that since only half of the current financial year is left, the implication for FY26 would be around 10 bps of GDP. Crudely put, the government's loss is the consumer's gain, it said.

 

“Over a year, led by stronger consumption, GDP growth can rise by 20 bps. But for this to transpire, the government should not run a tighter fiscal policy to offset the consumption boost. If we add on the benefits from the income tax cut earlier this year (0.3 per cent of GDP) and a lower debt servicing burden due to repo rate cuts, the overall boost to consumption can be 0.6 per cent of GDP,” it added. 

Expert take

 

• Bernstein: Fiscal hit of 20 bps, 40 bps in worst-case; capex cut can lower impact to 5 bps
• SBI research: ₹3,700 cr revenue loss; CPI moderation 65–75 bps by FY26–27
• ICICI Securities: Fiscal hit of less than 20 bps; GDP growth raised to 6.7%, inflation down to 2.5%
• UTI AMC: Fiscal loss absorbable; GST cuts ease inflation, give RBI rate room
• HSBC: 10 bps fiscal hit; GDP boost of 20 bps; total consumption lift 0.6% of GDP