India's domestic demand and consumption prospects are expected to improve, led by a prospective overhaul of Goods and Services Tax (GST) rates and supportive measures like reductions in personal income tax, looser monetary policy, increasing employment generation, and enhancing real wages, as per a Morgan Stanley report published on Monday.
The report emphasized that the new GST framework would have a major impact on economic growth, budget dynamics, and Consumer Price Index (CPI) inflation, thus influencing future monetary policy action.
In the near term, nonetheless, consumption behavior might experience some distortion, as households might postpone spending in anticipation of clarity on the novel GST structure.
"However, with new GST rates applying, there must be a recovery of likely postponed demand as well as complemented by enhanced affordability. In fact, reduced indirect taxes are linked to enhanced affordability, particularly for low-income households as indirect taxes tend to be regressive," the report added.
The sensitivity analysis of Morgan Stanley estimates overall stimulus impact at 0.5–0.6% of India's yearly GDP. The report also mentioned that CPI inflation would decline by as much as 40 basis points. Central and state governments would, however, experience fiscal pressure because of loss of revenue, although improved GDP growth would counteract this partially through increased tax revenues.
We anticipate the net impact on growth to be positive given that the multiplier of indirect tax reductions is 1.1, suggesting potential upside of 50-70bps," it further said.
Prime Minister Narendra Modi had earlier announced in his Independence Day speech that "next-gen GST reforms" would be launched before Diwali, aiming to benefit consumers, small businesses, and MSMEs.
Expanding on this, the Finance Ministry laid out its blueprint for a reduced, two-tier GST regime based on three pillars—structural reforms, rate rationalisation, and better ease of living. The proposal involves maintaining one merit slab and one standard slab with potential rates locked in at 5% and 18%.
The report highlighted that the next GST Council meeting, due in September, will be pivotal. Decisions on new GST rates, festive season patterns of consumption, headline and core CPI trends, monetary policy easing prospects, timeline for the implementation of the 8th Pay Commission, and developments in trade and tariffs will be the main points to watch.
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