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Key Points

Morgan Stanley predicts India's upcoming GST reforms will significantly boost consumption demand. The proposed two-tier tax system aims to benefit consumers and MSMEs by simplifying rates. Economists estimate the changes could add 50-70 basis points to GDP growth through improved affordability. The government plans to implement these changes before Diwali following GST Council approval.

Key Points: Morgan Stanley Sees GST Reforms Boosting India Consumption Demand

  • GST overhaul to simplify tax slabs from 4 to 2 rates
  • Modi govt targets Diwali deadline for consumer-friendly reforms
  • 90% of 28% slab items may shift to 18% bracket
  • Stimulus estimated at 0.5-0.6% of GDP with 50-70bps growth upside
3 min read

Upcoming GST reforms improve India's outlook for consumption, demand: Morgan Stanley

GST rate rationalization and tax cuts to spur consumption growth, says Morgan Stanley report ahead of Diwali reforms rollout.

"We expect the net effect on growth to be positive as the multiplier for indirect tax cuts is 1.1 - Morgan Stanley economists"

New Delhi, August 18

An overhaul in GST rate slabs, coupled with support from other measures such as personal income tax cuts, monetary policy easing, signs of pickup in job growth and improving real wages, improve the in outlook for consumption and domestic demand India, according to a report by Morgan Stanley.

The central government is likely to conduct a major overhaul of GST, a major source of indirect tax rates.

Morgan Stanley, in a report dated August 17, said this next-generation reforms should support consumption.

"Apart from this, personal income tax cuts, monetary policy easing, and signs of a pickup in job growth and improving real wages should also support consumption in the next few quarters," the report read, authored by economists Upasana Chachra and Bani Gambhir.

In the Independence Day speech from the ramparts of the Red Fort, Prime Minister Narendra Modi announced upcoming next-gen GST reforms before Diwali so as to benefit consumers, small industries and MSMEs.

Soon after, the Finance Ministry laid out its proposal of a simplified two-tier GST system built on the three pillars of structural reforms, rate rationalisation, and ease of living.

Earlier this week, sources said that the Central government has proposed to scrap the current slab of 12 per cent and 28 per cent of GST rates and keep only 5 per cent and 18 per cent GST rates.

Government sources said as part of the initiative, 99 per cent of 12 per cent slab are proposed to move in 5 per cent slab and 90 per cent of items in 28 per cent slab are proposed to move in the 18 per cent slab.

The sources said that the proposal will be studied by the GoM and a meeting of the GST Council is likely to be held in September-October to consider the proposal.

"We think the proposed new GST regime will likely have meaningful impacts on growth, fiscal balance, and CPI inflation, with implications for monetary policy. In the near term, there could be some impact on volume growth as consumers potentially defer their spending until clarity emerges on 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," read the multinational investment bank report.

As per the Morgan Stanley analysis, the total size of stimulus to be about 0.5-0.6 per cent of GDP on an annualised basis.

"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," it added.

Consumption accounts for 60 per cent of GDP and is the mainstay of the domestic demand story.

- ANI

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Reader Comments

A
Ananya R
As a CA, I've seen how complex GST compliance is for SMEs. Two slabs will reduce compliance costs significantly. But implementation must be smooth - last rollout was chaotic!
S
Sarah B
Interesting analysis by Morgan Stanley. The 0.5-0.6% GDP stimulus could be game-changing if executed well. But will the benefits actually reach middle-class families or get lost in bureaucracy?
V
Vikram M
Reducing 28% to 18% for 90% items is massive! Automobiles, electronics will become more affordable. Perfect timing before festive season 🎉 Hope dealers don't take advantage and keep old prices.
K
Kavya N
Good move but government must ensure proper awareness campaigns. Many small shopkeepers still don't understand current GST properly. Digital India should include GST education too!
M
Michael C
While the reforms look promising on paper, I'm concerned about short-term disruption. As MS report mentions, people may delay purchases until new rates are clear. Timing before Diwali seems risky.

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