GST rate cut has more emotional impact: Dipti Deshpande of Crisil

A recent report by Crisil said that the new GST rates will benefit 11 of the top 30 consumer items and one-third of the average consumer’s monthly expenditure. In an interaction with Business Today, Dipti Deshpande, Principal Economist at Crisil, explains the nuances of this report and says that while the interest rate cut may not have a direct impact on growth, it will have a much greater emotional impact, coming on the back of interest rate cuts on repo agreements, supportive fiscal policy and income tax cuts. It also says that despite the US tariffs, 2025 has sailed well but 2026 needs to be monitored as there are concerns about a global slowdown that could impact India’s exports. Edited excerpts:

It has been more than 20 days since the GST rate cuts came into effect. What do you think about the transmission rate and demand, and will it give an expected boost to consumption?

There are two or three elements when one talks about GST. The first is attention to the impact on growth, then on inflation, public finances and other factors. Even without the GST rate cut, domestic demand was boosted by other supportive measures. Rural demand was improving due to good monsoons and agricultural production, interest rates were falling, and inflation was at an all-time low. What the GST rate cut really does is that it has more than just a direct impact on growth, it will have a much larger emotional impact, after the repo rate cuts, supportive fiscal policy and income tax cuts.

In our report, we looked at about 30 items from the average Indian individual’s consumer basket, which constitute 88% of total monthly spending. Average GST rates for these fell from around 11% to 9%, representing a benefit of 200 basis points. To this extent, prices will fall. Second, we concluded that it was a very methodical exercise. Prices of basic items such as dairy products have been reduced. One can now either consume more of these products or use some of these savings to consume a little more of some other product that one was not consuming previously. Prices have also been reduced for categories such as processed foods, which have seen very rapid growth in consumption over the past two years. This basically indicates that there will be big offers coming for these categories.

And then, of course, there are automotive and consumer durables. The most important thing is timing, because at the beginning of the holiday season, consumers know exactly where prices will be beneficial. The timing is also good in another respect, because global growth is slowing and will affect India’s exports. So there will likely be compensation. We do not see the GST rate cut as a very big boost to growth, which means it will not push private consumption significantly either in the second half of this fiscal or the next fiscal because there are two things that private consumption needs fundamentally to continue growing on a sustainable basis. The first is that incomes themselves need to rise. Currently, disposable incomes are rising due to a lower tax burden. But ideally income needs to keep growing on an ongoing basis. Until that happens in urban areas, we don’t expect this to be a very big boost to growth. We have maintained our growth forecast at 6.5% for FY26, the same as in FY25. There

Some discounted items such as cars and consumer durables are purchased only once. How will this affect consumer demand?

For many consumer durables, this could be a one-time rise, because people may have been postponing consumption to take advantage of the interest rate cut. The other thing I feel is that it’s the people who anyway planned to buy some consumer durables who will benefit. From a simple behavioral perspective, if I saved more today to buy milk and other necessities, it would not be enough for me to buy a durable consumer good. This would be helpful for a first time buyer or someone who has been looking to order a replacement from the beginning. There will be a sustained rise in demand for these products only when incomes start rising. I think the government understands that. If you look at the government projections, if GST was expected to drive demand significantly, our growth expectations would have gone up to 7-8%, but that was not the case.

Do you think Q2 growth will be affected as people postpone purchases to Q3? What are your expectations for inflation?

In the second quarter, we expect GDP growth to be weaker compared to the first quarter, but will still benefit from the base effect. The forward shipment of exports also continued even in July and August. So, I think growth will remain fairly healthy even in the second quarter.

Regarding inflation, we lowered our expectations. The RBI’s figure is 2.6% for FY26, but we have kept our figure at 3.2% against 3.5% previously before the GST cuts. From a direct hit, I think inflation will come down, not just during this fiscal year, but over the next fiscal year. But we want to be a little careful with food prices as well. Currently, inflation is low and consumer price inflation in September is also likely to be softer. But there have been heavy rains in some states, and we want to monitor that.

Will GST rate cuts help offset the impact of US tariffs on growth because we are primarily a domestically driven economy?

Even since US President Donald Trump started talking about tariffs and eventually announced them, the way we have looked at the impact of tariffs on the entire economy has been from three perspectives. First, the impact this would have on exports directly in terms of what we ship into the United States. Our exports to the US as a proportion of India’s GDP are less than 2%, and if we take exports of exempt goods and services, it is close to about 1.5% of GDP. The direct hit, due to US tariffs, is expected to be somewhat lower on the GDP growth rate. But what the United States does is it creates a lot of uncertainty and higher tariffs on other economies like the Eurozone and China, which are our trading partners, are expected to slow growth in these countries.

So the impact on India will be a little higher. The impact of weak global growth on India’s exports is expected to be greater than the direct impact of higher US tariffs. But half of our fiscal year is over, and the 2025 calendar year for these countries is coming to an end as well. There was a lot of front loading of cargo. I think 2025, as a calendar year, has sailed well and that benefits us, because our commodity exports up to September have been fairly good. Now, we only need to worry about the next six months, as exports of goods slow, not only to the United States, but to the rest of the world as well. The calendar year 2026 is where most of the slowdown in major economies may occur. So 2025 looks good but 2026 is a bit more difficult now.