GST Rate Cut: Powerful Impact On CPI Inflation, Fiscal Deficit And RBI Policy

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The GST Rate Cut has emerged as one of the most significant tax reforms in recent years, reshaping how consumers, businesses, and policymakers look at India’s economic landscape. The Goods and Services Tax (GST) Council, at its 56th meeting, announced a sweeping reform that slashed rates on a majority of goods, effective from September 22, 2025. Out of 453 items reviewed, 413 saw reductions, while only 40 witnessed increases. Importantly, nearly 295 essential goods that were earlier taxed at 12% have now been moved into the 5% or NIL bracket.

This reform is not just about simplifying the tax system—it’s about sparking consumption, easing inflation, and supporting fiscal stability. Let’s dive into how the GST Rate Cut impacts CPI inflation, fiscal deficit, and RBI’s monetary stance.

Table of Contents

The New GST Structure Explained

A simpler two-slab system has replaced the Council’s complex four-tier structure: 5% for essentials and 18% for the majority of other commodities, with a 40% demerit rate for luxury and sinful goods. Due to this rationalization, the effective weighted average GST rate has decreased from 14.4% when GST was originally introduced to 9.5% now, down from 11.6% in 2019.

The aim is clear—reduce disputes, enhance compliance, and make taxation more business- and consumer-friendly.

Impact of GST Rate Cut on CPI Inflation

One of the most positive effects of the GST Rate Cut is its ability to moderate retail inflation (CPI). Economists estimate that by moving essentials into the 5% or NIL bracket, CPI inflation in that segment could fall by 25–30 basis points in FY26, assuming around 60% pass-through to consumers.

Additionally benefiting from a 40–45 basis point decrease are services and intermediate commodities.During FY26–27, the headline CPI is expected to decline by 65–75 basis points overall. The action is timely and consumer-friendly, especially because households have been negatively impacted by rising food and gasoline prices.

Sectoral Gains from the GST Rate Cut

FMCG and Essentials: Products of daily use, from packaged food to toiletries, are now cheaper. Companies may pass part of the benefit to consumers, driving rural demand.
Consumer Durables and Automobiles: Lower GST supports sales of appliances, electronics, and vehicle parts, boosting volumes during the festive season.
MSMEs: While the cut helps demand, issues like inverted duty structures and delayed refunds could strain their cash flow.
Agriculture and Manufacturing: Reduced tax on farm equipment and inputs helps lower costs, improving competitiveness.

How the GST Rate Cut Boosts Demand and Growth

Higher consumption volumes are usually the result of cheaper items. A multiplier impact occurs across industries as a household that saves ₹200 to ₹300 per month because of reduced GST spends more elsewhere. Businesses gain as well; some keep a portion to restore margins, while others pass on the tax savings. Consumer confidence rises in either case, which is essential for maintaining economic momentum.

Rural households, in particular, are expected to gain since essentials form a higher share of their consumption basket. Urban households may advance purchases of appliances and durables, creating a broad-based demand uplift.

Fiscal Deficit Concerns: Limited Impact

A natural question arises—won’t reducing tax rates widen the fiscal deficit? Economists believe the impact will be limited. While the government will see lower direct GST collections initially, the shortfall may be offset by:

Higher consumption boosting indirect revenues.
Greater compliance due to simpler slabs.
Reduced disputes and input credit adjustments.

Analysts project the FY26 fiscal deficit at around 4.4% of GDP, in line with earlier targets. Importantly, the fiscal burden will be shared by both the Centre and States, with States bearing a larger portion.

RBI’s Policy Stance After the GST Rate Cut

Lower inflation readings naturally give the Reserve Bank of India (RBI) more room to manoeuvre. The GST-driven disinflation, however, is unlikely to trigger an immediate rate cut. RBI will remain data-dependent, tracking food inflation, global oil prices, and core inflation trends.

Still, the GST Rate Cut enhances policy flexibility. If global risks ease and core inflation moderates, RBI could adopt a more accommodative stance, supporting growth further.

Real-World Impact on Consumers

Here’s how households may feel the difference:

A monthly essentials basket worth ₹5,000 could now cost ₹150–₹300 less depending on pass-through.
Appliances priced at ₹20,000 may come with lower MRPs or better festive offers, thanks to adjusted GST rates.

For the common man, these savings are tangible and meaningful, especially during the festive season.

Challenges and Risks

While the move is overwhelmingly positive, some risks remain:

Refund delays for MSMEs can trap working capital.
Supply bottlenecks may blunt the benefit if demand spikes during festivals.
Global shocks like crude oil spikes or food supply disruptions could offset disinflation gains.

Hence, policy execution and external conditions will shape the final impact.

Conclusion

The GST Rate Cut is a powerful reform that balances inflation control, demand stimulation, and fiscal prudence. By simplifying the structure, reducing rates on essentials, and boosting consumption, it delivers a positive sentiment across households and industries alike.

For consumers, it means lower prices. For businesses, it offers volume growth and simpler compliance. For policymakers, it provides a way to stimulate the economy without jeopardising fiscal discipline.

In short, the GST Rate Cut is more than just a tax tweak—it’s a strategic economic lever that could shape India’s growth trajectory over the next few years.

FAQs

Q1. What is the new GST structure after the GST Rate Cut?
With a unique 40% rate for sin/luxury products, the two-slab system of 5% and 18% has been simplified.

Q2. What is the impact of the GST Rate Cut on inflation?
Over FY26–27, it is anticipated to lower CPI inflation by 65–75 basis points.

It is expected to reduce CPI inflation by 65–75 basis points over FY26–27.

Q3. Will the fiscal deficit increase after the rate cut?
The impact is limited, with projections holding at 4.4% of GDP for FY26.

Q4. Will RBI cut interest rates because of this?
Not immediately. RBI remains data-driven and cautious about food and fuel price risks.

Q5. Which industries gain the most from the reduction in the GST rate?
FMCG, consumer durables, automobiles, agriculture, and manufacturing are the biggest beneficiaries.