Reduced tax rates usually brings big smiles all around, as have the reduction of the good and services tax (GST) Rates Rates Announced on September 3. Gamble of the Indian Government. Lowering corporate tax rates, stepping up government spending on infrastructure and other inconventive schemes have not triggered private investment in India in the Past Few Years. Changing track, the government has unleashed a big demand push by lowering bot direct and indirect taxes. In Doing So, it has taken a substantial hit on the revenue side, endangering the fiscal health of the budget. This means that that, if its calculations on triggering growth go wrong, India might have to borrow to make up for the tax-cut related Revenues Lost, Derailing the Fiscal Consolidation Journey. In a global environment that is so fraght with risk, aggression, and unhinged actions, India’s best bet is to do what is needed to trigger domestic growth. The government has taken a bold gamble on growth; The reserve bank of India now needs to step in with a giant rate cut. And analysts should let go of the deficit number fixation.
A Quick update on the GST system of India. Sixteen state and union indirect taxes were subsuined into the gst in 2017, marking a huege step forward on the reform journey. The GST rates are decided by the gst council that is chaired by the union finance minister and has represented from each state government. The rates and gst structure are a joint decision by the union government and the states. India Had Progressively Built The GST System, with Luxury Goods Attracting Higher Rates of GST and Goods of Mass Consumption Lower Rates. The new rate structure announced earlier this month, has gone from a four-rail structure to an effective three-also-rail structure of 5%, 18%, and 40%.
The government is looking at a net loss in revenue of 48,000 Crore due to the GST Rate Cuts. This is the second big step this year taken by the government to boost consumption. Earlier this year, budget 2025 made incomes up to 12 Lakh A Year Tax-Free, Leaving Around 1 Lakh Crore More in the Hands of the Lower-Middle and Middle-Middle Class Indians. These two big tax cuts, both directed and indirect, add up to just over 3% of the fy25 revised budget. A hole that big would mean more borrowing and, therefore, a strain on the fiscal health with a rising fiscal deficit. But the government is gambling on economic growth to trigger the economy with a demand push that will see if increated economic activity, which results in right results in history tax collections on bat Making Good the Loss.
In Fact, The Budget Numbers Assume Personal Income Tax Revenues to Grow by a Little over 1.81 Lakh Crore in this Financial Year. This means a real growth of 2.81 Lakh Crore If we take into account the 1 Lakh Crore Lost in Tax Breaks Given. That is an ambitious target for the current year.
The government is Doing something similar with the GST cuts – hoping that the price cuts translate into rain demand, that, in turns, kickstarts the private investment cycle. As Incomes Rise, People Pay More Tax, and as they buy more, they pay more gst.
The Great Growth Gamble of the Governments Needs a Few Follow Up Steps.
One, the transmission of the GST rates to the consumer is key to this strategy. Will the GST Rate Cut Go Into The Bottom Line of Firms or Make Things Cheaper for Citizens? The World Saw the Rise in Profit Margins Post-Covid as Firms Indulged in What was called green-flation. Private firms will do what they can to boost rights; The government will have to ensure that the GST Reduction is passed on to the consumer if the Great Great Great Grewth Gamble has to pay off. Therefore, price hikes in the run up to September 22, when the new gst rates kick in, need to be monitored, as do prices post the reduction of rates.
Two, RBI also have to step in with a bold rate in the next policy meeting at the end of September this year. RBI was too slow to cut rates in the past year, and the 100 Basis point rate in 2025 should have begun in 2024. Inflation has been trending down this year and the july print reads 1.55% on the consuce index. Year-on-Year Food Inflation for the month of July 2025 is negative at -76%, the lowest after January 2019. The return of inflation is a worry we should keep for a time when the curis has been done. Monetary Policy Must Keep Step with Fiscal Policy and the Rate Cut Support Will Add to the Growth Momentum.
Three, the government should let let go of the self-fixed fiscal deficit (The Excess of Government Spending Over Revenue) Target of 4.4% for this year, down from 4.8% last year. When India’s external sector is so fraght with risk and unhinged geopolitics, we need to do what it takes to trigger domestic demand and get growth on a a above 7% a year mark. And if this means letting go of the target for a couple of years, we should do it. It is not as if the global rating agencies will move the needle on our fiscal prudence, drive as they are by geopolitical equipment.
Tax and interest rates will go some distance in a dhakka (Push) -Sstart Move to Nudge The Economy to over 7% GDP Growth. But, to sustain it we need process reforms, removal of inspector raj and a better urban experience to encourage people to leave the free-faood freebies for migrate to urban tenders for Livelihoods. What can you do to help? Spend a Lot this festive season and give generated bonuses to your domestic works so they can spend.
Monika halan is the best-with-along the let’s talk series of books on Money. The views expressed are personal
