Reform that boosts growth

India’s GST reform of 3 September marks a transformative leap in indirect taxation, with a streamlined two-rate structure and bold rate reductions that will directly spur demand and growth. It is a strategic move to stimulate economic growth, neutralize the impact of US tariffs, and enhance ease of doing business across sectors. The headline impact, supported by SBI Research, is an estimated Rs 1.98 lakh crore increase in additional consumption in FY26, projecting the reform as an economic game-changer for households, various sectors, and the broader economy.

On September 3, the GST Council shifted from four complex tax slabs to a simplified two-tier structure: 5 per cent and 18 per cent, plus a demerit rate of 40 per cent for luxury and sin goods. Everyday essentials and infrastructure inputs now fall within the lower two slabs, benefiting millions. These changes are set to roll out from 22 September, aligning with the festive season and amplifying positive impacts. With new rates, daily items such as hair oil, soaps, butter, ghee, namkeens, chocolates, and coffee now attract just 5 per cent GST – a sharp reduction from previous levels of 12-18 per cent. Lifesaving medicines (33 major drugs) have been fully exempted, and staple foods (milk, paneer, chapatis) are taxed at 0 per cent GST.

Advertisement

This means more disposable income for every household, translating into broader spending for other goods and services. Sectors like cement (GST down from 28 to 18 per cent) and auto components will see cost reductions, boosting construction, automotive demand, and SME activity. SBI Research’s report is central to understanding the scale of the reform’s impact. The key projections of the GST reforms indicate an initial direct consumption boost of Rs 70,000 crore, derived from Rs 85,000 crore GST foregone, assuming a marginal propensity to consume of 0.7.

The total additional aggregate demand is projected to reach Rs 1.98 lakh crore due to the multiplier effect as new spending circulates through the economy. When combined with income tax changes, nearly Rs 5.31 lakh crore is exp e cte d to b e adde d to consumption, contributing about 1.6 per cent of GDP in FY26 and fueling robust economic momentum alongside GST reforms. After these two reforms GDP uplift of 100 to 120 basis points is expected, potentially pushing GDP growth to 6.5 per cent in FY26 and even reaching 7 per cent in FY27.

FMCG, auto, cement, retail, and healthcare sectors are set for a surge. Simpler compliance, input credit improvements, and lower litigation will help MSMEs expand, improve liquidity, and support job creation. The recent GST 2.0 reforms provide substantial benefits to businesses by simplifying tax compliance through the reduction of tax slabs, easing the complexity of tax calculations and filings. This reduction lowers working capital burdens and enhances liquidity with features like provisional refunds and automatic registration, enabling quicker access to funds.

Beyond rate cuts, the reforms introduce structural improvements such as automated online registration, faster refund disbursals, and solutions to inverted duty issues, particularly benefiting sectors like textiles, fertilizers, and renewable energy. These changes also resolve classification disputes and support a more competitive, resilient business ecosystem aligned with the vision of Atma Nirbhar Bharat, ultimately fostering ease of doing business, boosting consumer demand, and driving stronger festive and annual sales. Together, these measures improve cash flow, reduce compliance challenges, and create a more supportive environment for economic growth and business resilience under GST. The reform brings significant relief across everyday life.

With GST on essentials like Utensils, Feeding Bottles, Dairy Products, Sewing machines and parts lowered to 5 per cent, households can expect notable savings of 10-15 per cent on monthly grocery bills. Staple foods and staples like milk and paneer carry zero GST, assisting nutritional security. Healthcare benefits substantially with over 33 lifesaving medicines now GST-exempt, plus tax waivers on health and life insurance policies, thermometers, and glucometers, making healthcare accessible and affordable. Education sees relief via GST exemption on exercise books, pencils, erasers, and crayons, lowering costs for students and families.

Farmers benefit from lower GST rates on agricultural equipment and machinery (from 12 to 5 per cent), enabling investments in productivity and supporting rural incomes, a key pillar for Atma Nirbhar Bharat. Automobiles gain affordability as small cars (up to 1200cc petrol, 1500cc diesel) and motorcycles (up to 350cc) move to 18 per cent GST from 28 per cent, stimulating demand. Consumers also gain on electronics, with ACs, televisions, and refrigerators now taxed at 18 per cent instead of 28 per cent, encouraging upgrades and improving living standards.

The September 2025 GST reform, known as GST 2.0, represents a landmark step towards creating a simplified, fairer, and growth-oriented indirect tax system in India. By raising household purchasing power through thoughtful tax rate rationalisation and delivering broad-based structural and process reforms, GST 2.0 rigorously supports consumption, industrial growth, and overall economic vibrancy. This next-generation GST serves as a defining catalyst for inclusive and Atma Nirbhar Bharat, fostering ease of living and boosting economic momentum across sectors in the current geopolitical environment.

(The writer is Part-Time Member EAC-PM and Professor of Finance.)