A potential restructuring of Goods and Services Tax (GST) slabs, combined with measures like personal income tax cuts, monetary policy easing, rising job growth, and better real wage outlook, could give a significant push to India’s consumption and domestic demand, according to a Morgan Stanley report released on Monday.
The research highlights that the upcoming GST reforms will have far-reaching consequences for economic growth, fiscal stability, and inflation trends, with direct implications for monetary policy in the coming months.
The proposed GST system is expected to reshape India’s indirect tax framework, aiming to create a simplified structure and improve affordability for households.
In the short term, Morgan Stanley warns there might be a slight slowdown in consumption volume growth as consumers defer spending until clarity emerges on the new GST regime.
However, “once new GST rates come into force, there should be a recouping of potential deferred demand alongside support through improved affordability. Indeed, lower indirect taxes are associated with improved affordability, especially for low income households since indirect taxes are regressive,” the report highlighted.
According to Morgan Stanley’s sensitivity analysis, the overall size of the stimulus is projected to be approximately 0.5–0.6% of GDP on an annualized basis
CPI inflation is projected to decline by 40 basis points.
Fiscal balances for both the Centre and States may face some strain due to revenue loss, but this could be offset by improved tax collections driven by stronger GDP growth.
The report also underlined that, “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.”
During his Independence Day address, Prime Minister Narendra Modi declared that next-generation GST reforms will be introduced before Diwali, aimed at providing relief to consumers, small businesses, and MSMEs.
Following this, the Finance Ministry unveiled a proposal for a simplified two-tier GST structure, focusing on:
Structural reforms
Rate rationalisation
Ease of living
The overhaul is likely to introduce:
One standard slab
One merit slab
Potential GST rates at 5% and 18%
This two-slab system aims to streamline taxation, reduce compliance burden, and ensure affordability for low-income households.
Morgan Stanley identified several factors that will determine the success and timing of the GST overhaul and broader policy easing:
The outcome of the upcoming GST Council meeting in September
Festive season demand trends
Headline and core CPI movements
Timeline for 8th Pay Commission implementation
Updates on trade and tariff measures
These indicators will help assess the government’s fiscal strategy and the RBI’s space for monetary easing.
The upcoming GST reforms, coupled with complementary fiscal and monetary measures, are poised to play a transformative role in shaping India’s long-term consumption and growth story. While short-term disruptions and uncertainties may cause some shifts in consumer spending patterns, the overall trajectory remains positive.
A simplified two-slab GST structure is expected to reduce compliance burdens, enhance transparency, and promote ease of doing business for enterprises across sectors.
This streamlining will not only make goods and services more affordable for consumers but also improve tax buoyancy, ultimately contributing to stronger revenue generation for the government.
Moreover, by boosting demand, encouraging investments, and supporting small and medium businesses, the reforms could unlock significant economic potential.
As India advances towards a more efficient and inclusive taxation framework, these changes signal not just a structural adjustment, but a new chapter in the nation’s economic reform journey, fostering sustainable growth and stability.