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Positive for growth and inflation
According to Morgan Stanley, the proposed new GST regime will likely have meaningful impacts on growth, fiscal balance, and CPI inflation, with implications for monetary policy. Upasana Chachra, Chief India Economist, Morgan Stanley, said, “We estimate the total size of stimulus to be about 0.5-0.6 per cent of GDP on an annualised basis.”
Further, CPI inflation, the brokerage firm said, could see a downside of 40 bps while fiscal balances of centre and state likely come under pressure due to revenue losses. This could be partly offset by higher GDP growth improving direct and indirect 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 50-70 bps,” Upasana Chachra added.
Fiscal implications manageable
While revenue losses from GST rationalisation are likely, Morgan Stanley said, as growth picks up, the net effect will potentially be limited.
Per the current GST slabs, the 5 per cent slab on essential items contributes 7 per cent of total collections, 12 per cent slab about 5 per cent, 18 per cent slab the bulk of the collections at 65 per cent, and the top 28 per cent tax bracket 11 per cent of GST revenue. According to the new proposal, 90 per cent of taxable items currently in the 28 per cent bracket are likely to be moved to the 18 per cent slab, while 99 per cent of items in the existing 12 per cent may be shifted to the 5 per cent slab.
Pencilling in the rationalisation of rates, Morgan Stanley anticipated a 50-60 bps impact on overall tax collections (centre plus state) on an annualised basis. The surplus from compensation cess, which is set to expire in Mar-26, is also likely to free up some financial resources and provide some fiscal space to undertake GST rationalisation and mitigate any significant impact. All else being equal, Upasana Chachra said, “a loss in GST revenues could put upward pressure on the consolidated fiscal balance, but we believe that as growth picks up, the net effect will potentially be limited”. Further, specifically for FY26, Morgan Stanley estimated the impact on the central government deficit to be less than 0.1 per cent of GDP, assuming no offsetting impact.
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What are the key monitorables?
Key monitorables in the near term, according to Morgan Stanley, include the upcoming GST Council meeting in September-October, where finalisation of new GST rates will be closely tracked for their impact on consumption and government revenues. The festive season demand momentum will also be critical.
On the macro front, trends in both headline and core CPI will be monitored to assess the scope for further monetary policy easing. In addition, clarity on the timeline for the implementation of the 8th Pay Commission could have significant implications for consumption and fiscal balances.
Finally, any updates on global trade negotiations and tariff changes will be important to watch.