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On August 15, 2025, in his Independence Day address, Prime Minister Narendra Modi announced sweeping reforms in the Goods and Services Tax (GST) structure to be implemented by Diwali. He stressed the need to simplify GST and ease the burden on the common citizen. Following this, the GST Council, in its meetings on September 3 and 4, 2025, decided to reduce GST rates and rationalize slabs. The stated aim was to lower the prices of essential goods and provide relief to households.

The Council reduced the number of slabs from five (0%, 5%, 12%, 18%, and 28%) to three (0%, 5%, and 18%). However, the persistence of a 3% slab on gold and the creation of a 40% slab on luxury and sin goods (such as tobacco and pan masala) means the effective structure still contains five slabs. In practice, therefore, the framework has not changed as drastically as announced. That said, GST on daily-use items—soap, shampoo, toothpaste, snacks, chocolates, dairy products—was slashed from 12% or 18% to 5% or even zero. Taxes on medicines, medical equipment, automobiles, and health and life insurance were also reduced or waived.

On September 21, 2025, Modi addressed the nation again, declaring September 22–29 as “Bachat Diwas” to encourage savings and promote the benefits of the GST cuts. These changes took effect on September 22. Supporters and government representatives framed the move as a counter to U.S. President Donald Trump’s 50% tariff on Indian imports. Analysts at Citi Group, Nomura, and Morgan Stanley estimated U.S. tariffs could shave 0.6%–1.1% off India’s GDP. GST cuts, they argued, could offset this by boosting domestic demand. Indian financial institutions have projected that GST 2.0 could add 0.2%–0.7% to GDP growth.

Yet the question remains: why would the government reduce GST, a cornerstone of its revenue? The Union Budget 2025 documents reveal that GST contributed 27.5% of central tax revenue in 2024–25 and is projected to remain at that level in 2025–26. Collections in 2024–25 stood at ₹10.61 lakh crore, expected to rise to ₹11.78 lakh crore in 2025–26. This makes the reform a gamble with substantial fiscal consequences.

Economic Drivers

Economically, GST cuts were intended to revive demand and reinvigorate growth. India’s GDP rests on four pillars: private final consumption, government final consumption, gross capital formation (primarily private investment), and net exports. Data from the Ministry of Statistics in May 2025 showed that private consumption accounted for 56.5% of GDP in 2024–25, down from 59.5% in 2008–09. The decline underscores weak consumer demand, a critical engine of growth.

Government spending and private investment have also underperformed, leaving the state to prop up the economy. This stagnation is tied to successive disruptions—demonetization (2016), GST rollout (2017), and the harsh COVID-19 lockdown (2020)—which particularly hurt agriculture, MSMEs, and informal workers. While large corporations adapted, smaller firms lost ground. The Russia-Ukraine conflict in 2022 added runaway inflation, eroding household purchasing power and curbing demand.

Corporate strategies have shifted accordingly. In sectors such as automobiles, electronics, and consumer durables, firms are increasingly focusing on premium products or raising prices, rather than serving mass demand. With weak consumption dragging down investment, the cycle of low demand and low private investment has hardened.

The government has tried various demand-side measures: PM-Kisan (2019), corporate tax cuts (2019), free grain distribution (2020 onwards), and steep hikes in capital expenditure (₹10 lakh crore in 2023–24; ₹11.11 lakh crore in 2024–25; and a proposed ₹11.21 lakh crore for 2025–26). More recently, individuals earning up to ₹12 lakh were exempted from income tax, and the RBI cut repo rates to spur demand. Yet the results have fallen short.

In this context, GST cuts became a last-resort instrument to stimulate demand indirectly. But the relief—₹48,000 crore in consumer savings—is modest against India’s GDP of ₹188 lakh crore. This highlights the need for deeper structural reforms beyond temporary tax relief.

Political Drivers

Two political motives also stand out. First, GST is borne directly by consumers. With Bihar assembly elections approaching, cheaper everyday goods could translate into political goodwill. The BJP-led government is clearly betting that relief at the shop counter will translate into votes.

Second, external optics matter. The U.S. Trade Representative has long criticized India’s GST as convoluted. By simplifying slabs and reducing rates, India hopes to present itself as a fairer trading partner, potentially softening U.S. tariff positions in future negotiations.

The Impact

Optimists argue that GST cuts will lower inflation and ease household budgets. Banks such as HDFC, IDFC, SBI, and Bank of Baroda estimate inflation could decline by 0.5–0.8% over 12 months—if companies pass on the savings. History tempers this optimism. A 2020 Consumer Affairs Ministry report found that after the 2019 GST cut (from 18% to 12%), only 30% of firms actually lowered prices. With the National Anti-Profiteering Authority disbanded in 2022, enforcement is weak. The benefits may not reach consumers in full.

Fiscal implications are equally pressing. More than half of GST revenues flow to states. The cuts are expected to reduce collections by 10–15% (roughly ₹1.2 lakh crore). Without compensation, states may resort to borrowing, worsening their debt profiles. Rising demand for credit from both states and the Centre is already pushing up bond yields despite RBI interventions. States may raise taxes on petrol, diesel, alcohol, and vehicle registration to plug gaps—moves that could neutralize the inflation gains. The Centre, for its part, may impose new cesses, as it has in the past, further complicating the picture.

Conclusion

The GST rate cuts mark one of the most significant tax reforms since the system’s inception. They are designed to put money in people’s pockets, stimulate demand, and strengthen India’s trade stance amid tariff headwinds. Politically, the timing is calibrated for electoral advantage. Economically, the step addresses short-term demand, but its scale may be too modest to shift growth fundamentals.

Ultimately, the effectiveness of GST cuts will depend on vigilant

monitoring, fair pass-through by corporations, and careful fiscal balancing by both Centre and states. Without complementary reforms, this bold move risks becoming yet another temporary stimulus rather than a transformative economic reset.