The recent GST tax rate cuts can help lower inflation if companies pass on the benefits to consumers, potentially allowing the Reserve Bank of India (RBI) to reduce the repo rate by another 25 basis points in the fourth quarter of this year, an HSBC report said on Thursday.
According to the report, the tax cuts could bring down headline CPI inflation by 1 percentage point. “However, if the pass-through is only partial, the fall in inflation may be closer to 0.5 percentage points. We expect the RBI to cut rates once again by 25 bps in 4Q25, taking the repo rate to 5.25 per cent,” HSBC noted.
On the consumption side, several essential items saw a rate cut, including toothpaste, shampoo, small cars, air conditioners, and medicines. On the production side, inputs in sectors such as agriculture (tractors), labour-intensive goods (leather and marble), construction (cement), power (renewable energy devices), and healthcare (medical devices) will face a lower tax burden. Additionally, individual life and health insurance policies have been exempted from GST.
The report said the government’s loss is the consumer’s gain. Over the year, stronger consumption could raise GDP growth by 0.2 percentage points. However, for this to materialise, the government should avoid tightening fiscal policy to offset the consumption boost.
HSBC further pointed out that the GST cuts should be viewed in a broader context. Combined with the benefits of this year’s income tax cut (0.3 per cent of GDP) and lower debt servicing costs due to repo rate reductions (0.17 per cent of GDP), the overall boost to consumption could reach 0.6 per cent of GDP. “Of course, a part of this could be saved instead of spent, lowering the net boost,” the report cautioned.
The GST rate rationalisation was not limited to lowering taxes. Some inverted duty structures were corrected in the textiles and fertiliser sectors. Plans were also laid out for easier GST registration, pre-filled returns, and quicker refunds. If implemented, these measures will improve the ease of doing business, the report added.
-IANS