India's domestic demand and consumption outlook will improve with a potential overhaul of Goods and Services Tax (GST) rates and other drivers like personal income tax reductions, monetary loosening, improved job creation, and increasing real wages, Morgan Stanley said in a report on Monday.
As per the report, the suggested restructuring of GST would have meaningful implications for growth, fiscal balances, and Consumer Price Index (CPI) inflation, which will further have implications for monetary policy actions.
Short-term softness in demand may surface as consumers wait till there is clarity on the new GST regime before making purchases.
Nevertheless, when new GST rates are introduced, there must be recouping of latent deferred demand along with assistance by enhanced affordability. In fact, lower indirect taxes are linked to enhanced affordability, particularly for low-income households as indirect taxes are regressive," the report noted.
According to Morgan Stanley's sensitivity analysis, "we estimate the total size of stimulus to be around 0.5-0.6 per cent of GDP on an annualised basis." The study further mentioned that CPI inflation might come down by around 40 basis points. Meanwhile, the fiscal health of central and state governments might be strained as a result of revenue losses, but higher GDP growth could act to counter this through better tax collection.
“We expect the net effect on growth to be positive as the multiplier for indirect tax cuts is 1.1, implying potential upside of 50-70bps,” the report said.
Prime Minister Narendra Modi, in his Independence Day address, had announced “next-gen GST reforms” before Diwali, aimed at providing relief to consumers, micro and small businesses, and MSMEs.
Later, the Finance Ministry released its suggestion of a simplified two-tier GST system on the basis of three pillars—structural reforms, rate rationalization, and ease of living. The draft structure proposes one merit slab and one standard slab, with potential tax rates of 5% and 18%.
The next GST Council meeting, likely in September, will play a crucial role in deciding the new rates. Other trends to watch out for are festive season demand, trends in CPI, chances of monetary policy easing, timeline for implementing the 8th Pay Commission, and any news on trade and tariff policies, the report further added.
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