GST reforms can further lower inflation, allow RBI to cut repo rate by another 25 bp this year

New Delhi, Sep 4 (IANS) The GST tax rate cuts can further lower inflation if companies pass on all benefits to the consumers, allowing the Reserve Bank of India (RBI) to cut repo rate once again by 25 bp in the fourth quarter this year, a report said on Thursday.

The GST tax rate cuts can lower headline CPI inflation by 1 percentage point.

"However, if the pass-through is only partial, the inflation fall could be closer to 0.5 ppt. We expect the RBI to cut rates once again by 25bp in 4Q25, taking the repo rate to 5.25 per cent," an HSBC report said.

On the consumption side, several essential items saw a rate cut (toothpaste, shampoo, small cars, air conditioners, and medicines).

On the production side, inputs in several sectors will face a lower tax burden (tractors in the agriculture sector, leather and marble in labour-intensive goods, cement in the construction sector, RE devices in the power sector, medical devices in the healthcare sector).

Some exemptions were added, and individual life and health insurance policies will be exempt from GST.

According to the report, the government's loss is the consumer's gain.

Over a year, led by stronger consumption, GDP growth can rise by 0.2 ppt. But for this to transpire, the government should not run a tighter fiscal policy to offset the consumption boost, it said.

"It is also important to put the GST cuts in a broader context. 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 (0.17 per cent of GDP), the overall boost to consumption can be 0.6 per cent of GDP," the report said.

“Of course, a part of this could be saved instead of spent, lowering the net boost," it added.

The GST rate rationalisation was not limited to lower and lesser tax rates.

"Some of the inverted duty problem was corrected for the textiles and fertiliser sectors. Plans were laid out for easier GST registration, pre-filled returns, and quicker refunds. If these improvements are indeed made, it will improve the ease-of-doing-business environment," the HSBC report noted.

--IANS

na/vd