GST 2.0 Reforms May Cut Inflation by 75 bps, Spur Consumption by ₹1 Lakh Crore: Report

India's recent Goods and Services Tax (GST) reforms have the potential to reduce headline inflation by as much as 75 basis points and unlock up to ₹1 lakh crore of additional consumption, a new report has said.

“The overall impact on CPI is expected to be around 55-75bps. Thus we revise downward our current estimate of headline CPI to 3.1 per cent from our previous forecast of 3.5 per cent,” said a report from Bank of Baroda’s research wing.

Economists pointed out that the reorganization of GST, which has brought 99% of commodities under the 0%, 5% or 18% slabs, is likely to reduce effective tax rates to around 10–11%.

We anticipate the taxable consumption class will work out to Rs 150-160 lakh crore. This figure can even be more after we receive the new share of GST collected on each head," the bank said.

The study put the private consumption at a net gain of ₹70,000 crore to ₹1 lakh crore or 0.2–0.3% of GDP. The government has envisaged a revenue loss of about ₹48,000 crore, but the bank pointed out that this would go straight into consumer benefits.

But assuming that lower rates of indirect taxation will lead to lower prices, we estimate a gain of about Rs 20,000-50,000 crore," it further said.

The report indicated that food inflation could come down by 25–35 bps in the next six months with relief from lower taxes on prepared food, edible oils, bread, noodles, butter, and vanaspati lowering household expenses. Core inflation would also come down by 30–40 bps with relief on rate cuts on personal care products, household appliances, and medicines.

Slower GST rates also will drive production in non-durable items like jams, jellies, honey, and juices, and provide a boost to consumer credit demand during the festival season.

“Index of Industrial Production (IIP) growth, which was thought to be pressured from higher tariffs, might get significant support from domestic demand,” the bank noted.