With GST 2.0, the Modi government aims to shift focus from capex to consumption-led growth. The simplified tax structure is expected to lower prices and boost demand, though it may challenge fiscal targets, say experts
The Modi government's GST 2.0 reforms, coming on the heels of the Rs 1 lakh crore direct tax bonanza announced in the Budget, are being considered as a strategic move by the Modi government to revive domestic consumption and cushion the economy against the global geopolitical headwinds. Economists believe the GST 2.0 reforms could mark the beginning of a broader reform cycle, which will unleash the animal spirits of the economy.
At the core of GST 2.0 is the rationalisation of the currently complex four-tier rate structure (5%/12%/18%/28% - with cess in some cases) to a simplified, mostly two-tier rate structure (5%/18%). Analysts say these measures will lower consumer prices, cut compliance costs and have a multiplier impact on the overall economy.
Here's what top brokerages expect from the new GST 2.0 regime and its potential to boost consumption in the long run.
Axis Securities: Calling the GST reforms a new chapter in consumption-led growth, the brokerage says the government has now shifted gears from Capex-oriented spending to consumption-led spending, starting from the FY26 Budget onwards. It believes the consumption-led growth will have a cascading effect on the economy, and provide a much-needed boost to the private capex, which has been sluggish for several years. "The past decade was defined by development-focused schemes, with the construction of roads, bridges, metro systems, and other infrastructure projects serving as benchmarks for the ruling party's success. Now, with the Feb’25 budget, more focus has been given to the rural masses and the middle class for spurring consumption via tax relief, indicating a shift in the economic regime. And now, GST 2.0 reforms are further strengthening the agenda of consumption pick-up moving forward."
Motilal Oswal Financial Services: The brokerage stated that through simplified rates and processes, the government intends to boost consumption sentiment. The GST reforms will enhance consumer sentiment and provide a consumption fillip, said a research note by the brokerage. "The measure should support growth and encourage longer-term capacity building to drive the economy toward greater self-reliance in a volatile and uncertain global scenario."
PL Capital: The brokerage says the government's GST 2.0 measures, which has indicated a reduction in taxes to the tune of Rs 48,000 crore and reduction in taxes on wide ranging items of daily use by common man. "There has been steep cut in taxes on auto, processed foods, personal care, cement, AC and durables, books and stationery, hotels (<Rs7,500 rent), agriculture tractors, implements and inputs, kitchenware, insurance, specified medicines, etc. Food delivery services are likely to be taxed at 18% now. We believe that it will boost demand for consumption-oriented companies."
JM Financial: The brokerage says there is a clear intent by the government to support domestic consumption through fiscal measures. However, it asserts that the tax revenue foregone due to GST rate cuts will eventually stretch India’s fiscal deficit position above the target of 4.4% of GDP in FY26, unless the government absorbs it through slower capex intensity, says the brokerage major. "We believe that the markets were already positioned in favour of consumption since the announcement of the rate rationalisation in GST on 15th August, however incremental move away from capex oriented sectors cannot be ruled out."