Rate reductions are welcome but GST reform is a work in progress

Consumption will get a boost but India still has too many rate slabs and the macro impact demands careful consideration

- SUDIPTO MUNDLE

The large reduction in goods and services tax (GST) rates from 22 September, the start of this year's Navratri, followed an equally large increase in the exemption threshold for personal income tax six months earlier in the 2025-26 budget. In a well-publicized message, Prime Minister Narendra Modi described this as a bumper Diwali gift for consumers, especially those in the Indian middle class.

Limiting herself to the economic rationale for the rate reduction, Finance Minister Nirmala Sitharaman explained that a significant increase in the purchasing power of consumers, assuming the rate reduction is fully passed on, will jack up aggregate consumption demand and hence economic growth, apart from giving relief to small producers. Critics have claimed that the GST rate reduction is motivated by the forthcoming Bihar elections and other state polls to follow. That may well be true. However, this column will confine itself to the economic implications of the GST rate reduction.