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.

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*Senior economist based in Ahmedabad