GST reduction: Monthly benefit ₹115 per household, rich to reap huge gains, govt debt, deficit to rise

By Prof. Hementkumar Shah*

Recent changes in the structure of the Goods and Services Tax (GST) have been interpreted in two ways: as an incentive package, and as a measure to boost demand in the market which would, in turn, raise GDP growth. Both assumptions are not entirely baseless. The reason is that these changes are not aimed at fixing some temporary problem but are structural reforms within the GST system, which has been in place since 2017.

It is being argued that since GST rates have been reduced on various goods and services, demand for them will rise, leading to higher production and thus faster GDP growth. It is possible that if prices fall, people may buy more, and the government’s revenue may not decline despite lower tax rates. But will this really happen? That is doubtful.

The changes broadly involve three aspects: the reduction of GST rates into two slabs, reduced compliance time and costs for businesses, and a likely decrease in disputes and court cases over classification.

The critical question, however, is who will benefit from these changes—consumers, producers-traders, or workers? If tax reductions translate fully into lower prices, consumers benefit. But producers may choose to keep prices the same and pocket the difference, or reduce prices only partially, passing limited benefits to consumers. In that case, demand may not increase significantly. Even if prices fall, it depends on which goods become cheaper. If car prices fall, for instance, only those who can afford lakhs of rupees for a car will benefit, not the poor.

Some companies may pass benefits to workers through wage increases, but how many would actually do so is uncertain. Alternatively, companies could retain the entire tax benefit, boosting profits. This could lead to more investment, higher production, employment, and growth, but again, this is speculative.

On the government’s side, the budget had projected ₹11.8 lakh crore in GST revenue this year, compared to ₹10.6 lakh crore last year. With rate cuts, estimates suggest a shortfall of about ₹48,000 crore. Since GST contributes about 18 percent to the Union Budget, such a shortfall raises concerns. If the government maintains spending levels, it will have to borrow more, increasing debt and fiscal deficit. If it cuts spending instead, overall national expenditure could fall, reducing demand and potentially lowering GDP growth rather than raising it.

India’s fiscal deficit is already estimated at ₹15.69 lakh crore, to be financed through borrowing. How these GST changes will impact this balance remains unclear. What is certain is that these reforms will not inject as much vitality into the economy as is being claimed. The reason is that the actual benefit reaching ordinary people is negligible.

India has around 35 crore households. If the total tax relief of ₹48,000 crore is distributed across them, the average household benefit works out to just ₹1,371 annually, or about ₹115 per month. For a family with a monthly income of ₹10,000, such a small relief will not meaningfully alter their economic condition. In contrast, a wealthy individual buying a ₹10 lakh car could save as much as ₹1 lakh in one go due to reduced GST rates.

Thus, while the average benefit appears small, in reality the wealthy stand to gain disproportionately. Those who already have purchasing power will benefit more, while the poor will see almost no change. A fall in GST from 28 to 18 percent on cars, for example, may bring windfall gains to the rich but will do nothing to raise demand among the poor. Consequently, it is hard to argue that such reforms will significantly raise GDP growth.

---

*Senior economist based in Ahmedabad

Comments

Gram sabha as reformer: Mandla’s quiet challenge to the liquor economy

By Raj Kumar Sinha* This year, the Union Ministry of Panchayati Raj is organising a two-day PESA Mahotsav in Visakhapatnam, Andhra Pradesh, on 23–24 December 2025. The event marks the passage of the Panchayats (Extension to Scheduled Areas) Act, 1996 (PESA), enacted by Parliament on 24 December 1996 to establish self-governance in Fifth Schedule areas. Scheduled Areas are those notified by the President of India under Article 244(1) read with the Fifth Schedule of the Constitution, which provides for a distinct framework of governance recognising the autonomy of tribal regions. At present, Fifth Schedule areas exist in ten states: Andhra Pradesh, Chhattisgarh, Gujarat, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Odisha, Rajasthan and Telangana. The PESA Act, 1996 empowers Gram Sabhas—the village assemblies—as the foundation of self-rule in these areas. Among the many powers devolved to them is the authority to take decisions on local matters, including the regulation...

MG-NREGA: A global model still waiting to be fully implemented

By Bharat Dogra When the Mahatma Gandhi National Rural Employment Guarantee Act (MG-NREGA) was introduced in India nearly two decades ago, it drew worldwide attention. The reason was evident. At a time when states across much of the world were retreating from responsibility for livelihoods and welfare, the world’s second most populous country—with nearly two-thirds of its people living in rural or semi-rural areas—committed itself to guaranteeing 100 days of employment a year to its rural population.

Policy changes in rural employment scheme and the politics of nomenclature

By N.S. Venkataraman* The Government of India has introduced a revised rural employment programme by fine-tuning the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which has been in operation for nearly two decades. The MGNREGA scheme guarantees 100 days of employment annually to rural households and has primarily benefited populations in rural areas. The revised programme has been named VB-G RAM–G (Viksit Bharat Guarantee for Rozgar and Ajeevika Mission – Gramin). The government has stated that the revised scheme incorporates several structural changes, including an increase in guaranteed employment from 100 to 125 days, modifications in the financing pattern, provisions to strengthen unemployment allowances, and penalties for delays in wage payments. Given the extent of these changes, the government has argued that a new name is required to distinguish the revised programme from the existing MGNREGA framework. As has been witnessed in recent years, the introdu...

Rollback of right to work? VB–GRAM G Bill 'dilutes' statutory employment guarantee

By A Representative The Right to Food Campaign has strongly condemned the passage of the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) (VB–GRAM G) Bill, 2025, describing it as a major rollback of workers’ rights and a fundamental dilution of the statutory Right to Work guaranteed under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). In a statement, the Campaign termed the repeal of MGNREGA a “dark day for workers’ rights” and accused the government of converting a legally enforceable, demand-based employment guarantee into a centralised, discretionary welfare scheme.

A comrade in culture and controversy: Yao Wenyuan’s revolutionary legacy

By Harsh Thakor* This year marks two important anniversaries in Chinese revolutionary history—the 20th death anniversary of Yao Wenyuan, and the 50th anniversary of his seminal essay "On the Social Basis of the Lin Biao Anti-Party Clique". These milestones invite reflection on the man whose pen ignited the first sparks of the Great Proletarian Cultural Revolution and whose sharp ideological interventions left an indelible imprint on the political and cultural landscape of socialist China.

'Structural sabotage': Concern over sector-limited job guarantee in new employment law

By A Representative The advocacy group Centre for Financial Accountability (CFA) has raised concerns over the passage of the Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (VB–G RAM G), which was approved during the recently concluded session of Parliament amid protests by opposition members. The legislation is intended to replace the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

Making rigid distinctions between Indian and foreign 'historically untenable'

By A Representative Oral historian, filmmaker and cultural conservationist Sohail Hashmi has said that everyday practices related to attire, food and architecture in India reflect long histories of interaction and adaptation rather than rigid or exclusionary ideas of identity. He was speaking at a webinar organised by the Indian History Forum (IHF).

India’s Halal economy 'faces an uncertain future' under the new food Bill

By Syed Ali Mujtaba* The proposed Food Safety and Standards (Amendment) Bill, 2025 marks a decisive shift in India’s food regulation landscape by seeking to place Halal certification exclusively under government control while criminalising all private Halal certification bodies. Although the Bill claims to promote “transparency” and “standardisation,” its structure and implications raise serious concerns about religious freedom, economic marginalisation, and the systematic dismantling of a long-established, Muslim-led Halal ecosystem in India.

From jobless to ‘job-loss’ growth: Experts critique gig economy and fintech risks

By A Representative Leading economists and social activists gathered in the capital on Friday to launch the third edition of the State of Finance in India Report 2024-25 , issuing a stark warning that the rapid digitalization of the Indian economy is eroding welfare systems and entrenching "digital dystopia."

Search This Blog