GST revamp: India's new regime to lift demand, consumption - here's what Morgan Stanley says

India’s consumption story could soon receive a major boost, with a mix of tax reforms and economic measures paving the way for stronger domestic demand, according to a new Morgan Stanley report.

The report, dated August 17, said an overhaul in GST rate slabs, along with support from personal income tax cuts, monetary policy easing, signs of pickup in job growth and improving real wages, will brighten the outlook for consumption in the country.


Morgan Stanley economists Upasana Chachra and Bani Gambhir wrote, “Apart from this, personal income tax cuts, monetary policy easing, and signs of a pickup in job growth and improving real wages should also support consumption in the next few quarters.”

The central government is preparing to carry out a major revamp of the Goods and Services Tax (GST), a key source of indirect tax revenue.

In his Independence Day speech from the Red Fort, PM Narendra Modi announced that next-gen GST reforms would be rolled out before Diwali to benefit consumers, small industries and MSMEs.

Shortly after, the finance ministry outlined its plan for a simplified two-tier GST system, based on three pillars: structural reforms, rate rationalisation and ease of living.

Sources said earlier this week that the Centre has proposed scrapping the existing 12% and 28% GST slabs, leaving only 5% and 18% rates.

Under the plan, 99% of items currently taxed at 12% would move to the 5% slab, while 90% of items taxed at 28% would be shifted to the 18% bracket.

The proposal is expected to be reviewed by a GoM, with a GST Council meeting likely to be held in September or October to discuss the changes.

The report, cited by ANI, said “We think the proposed new GST regime will likely have meaningful impacts on growth, fiscal balance, and CPI inflation, with implications for monetary policy. In the near term, there could be some impact on volume growth as consumers potentially defer their spending until clarity emerges on new GST regime. However, once new GST rates come into force, there should be a recouping of potential deferred demand alongside support through improved affordability.”

The analysis estimated the total size of stimulus to be about 0.5-0.6% of GDP on an annualised basis. “We expect the net effect on growth to be positive as the multiplier for indirect tax cuts is 1.1, implying potential upside of 50-70 bps,” it said.

With consumption accounting for 60% of India’s GDP, the proposed reforms could provide a significant push to domestic demand.

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