With GST 2.0, bonanza for consumption and investment: Indian Express 4th September 2025

 The GST 2.0 regime will be effective from September 22 and has been timed really well. This would be the start of the festival season, where typically Indian households buy consumer goods and book homes. These are auspicious times, and households have held back purchases ever since it was announced on Independence Day that there was a rationalised scale to be announced in September.

The timing is significant for two reasons. First, a common lament from FMCG companies was that urban demand was down due to high inflation in the past. With GST rates being rationalised in the downward direction, this will be the cure for sure. There should be an immediate fall in prices that should spur demand. In fact, savings on FMCG products across the board should release significant resources for households to spend on other goods. Second, the tariff issue has reached a dead end with the 50 per cent rate now a reality. With several inputs now having lower GST rates, the exporters will get some relief on the cost side, which can aid in removing a part of the tariff disadvantage.

How do prospects for consumption look? The government has announced that the overall revenue loss would be Rs 48,000 crore. This is not as large as has been estimated by analysts. There is a gross revenue foregone of Rs 93,000 crore, of which Rs 45,000 crore is being recouped by higher duties on a set of luxury items. Any revenue foregone is a gain for the consumers

The way the GST council has segregated goods is interesting. All necessities go at a lower rate of 5 per cent or are exempt from the tax. Comforts, which include consumer goods, go at a lower rate of 18 per cent, while luxuries, including sin goods, go with a higher rate of 40 per cent. This is probably the most equitable way of rationalising rates. Demand for necessities and comforts should go up. In fact, for consumer goods, including auto, it is a major boost as costs come down substantially. An entry-level car of Rs 5 lakhs will save Rs 50,000 as GST, which is a big gain. The same holds for two-wheelers and tractors. For sin goods and luxuries, the GST does not matter as demand is inelastic. There could not have been a better reclassification.

Will government fiscal balances be affected? The revenue foregone of Rs 48,000 crore can be absorbed in the budget, given that other revenue has been buoyant and the RBI transfer of surplus was higher than expected. Therefore, in the absence of any slippages, the fiscal deficit number can be maintained at 4.4 per cent. The compensation part for states has not yet been announced. But given the intrinsic buoyancy in the economy, there should not be a major challenge. In fact, higher spending by households should generate a secondary chain of GST revenue for the Centre and states. Bond yields have reacted positively, which vindicates this position.

How about GDP growth? Prima facie, consumption should increase immediately, and if the pent-up demand for the last two years is clubbed with tax cuts as well as the income tax relief given by the budget, we can expect a big jump in spending. This, in turn, should also help the industry as capacity utilisation improves and companies go in for fresh investment at the secondary stage. This could materialise towards the end of the year, depending on how good the spending is. Therefore, the two major engines of consumption and investment should be positive during the second half of the year, which will add to GDP growth.

The biggest impact will be on inflation as consumer prices come down. The government will have to ensure that companies do not hold back these gains, and the anti-profiteering clause needs to be implemented with alacrity. The core inflation part will see a decline, which will have a soothing effect on headline inflation. The advantage is that this benefit will flow over a period of a year, as lower prices will get reflected over higher base numbers in the last 12 months. This can help in moderating the inflation projections of the RBI in FY27, too.

Will this impact credit policy outcomes? Here, there is a shoulder shrug. Lower inflation will prevail in the coming months, which will bring down projections for sure, providing more room to the RBI when it comes to rate cuts. On the other hand, growth prospects look better after this announcement, and the rate of 6.5 per cent does look very much on the cards. If so, then it will be a subjective call to take on rates as inflation will trend lower while growth will hold up. A pause for the time being looks more likely.

The GST council, however, has not included fuel products, which presently have the highest effective taxes when excise and VAT are combined. This will probably be the last frontier that has to be addressed at some point in time, as the rates are way above those of other goods and services.

The GST has been one major success story in the process of reforms, which has withstood several challenges, including Covid, where revenue ground to a halt, thus affecting overall collections. This made compensating states a challenge. This was overcome quite successfully and the system has reverted to normal to enable the council to bring about this rationalisation. Growth in collections is a direct function of overall growth, which has to tick to enable the same. The present dispensation rationalises rates as well as corrects inverted duty structures where inputs are taxed at higher rates than the final output.

Hence, the government and RBI have set the right preconditions for growth: The former through the fiscal incentives on income tax and GST and the latter on interest rates. Theoretically, this should work well, and the final result will be known in the next two quarters.

GST rationalization can be key to increasing consumption: Free Press Journal 1st Sept 2025

 https://www.freepressjournal.in/analysis/gst-rationalisation-can-be-key-to-increasing-consumption

Ruminations on inflation targeting: Business Line 3ed September 2025

 

Book review: The Economic Consequences of Mr Trump by Philip Coggan: Financial Express 31st August 2025

 Donald trump is known for everything except consistency. He likes to have his way by making ‘deals’, and his sycophantic followers provide the eulogies for him being a deal maker. His tariff armoury is one of its kind, which has shaken the entire world simply because in an era of globalisation, no country has even attempted this measure. It goes with the macho image he projects, and his reaction to the now famous TACO—Trump always chickens out—was to announce something even more bizarre. This and more are presented by Philip Coggan in his rather delightful book titled, The Economic Consequences of Mr Trump, in an apparent nod to Keynes’ book titled, The Economic Consequences of Mr Churchill.  

Mr Trump does not really think before speaking, and this is manifested in his talk on taking over Greenland for security or calling the head of Canada as governor of ‘another state of the USA’ or even taking over the Panama Canal. His announcements in April, which he called Liberation Day, were nothing short of baseless. The concept of reciprocal tariff was based on the ratio of trade surplus to imports from the country. Not surprisingly, it led to absurd numbers for some countries. In fact, even countries with which the USA had a trade surplus were levied a minimum base tariff of 10%. Therefore, the entire policy had no intellectual rationale.

Further, the entire world, according to the author, had already lowered their effective tariff rates to something in the single-digit range, and hence calling it reciprocal was incorrect. The main trading partners such as Switzerland had a rate of 1.7%, while EU had 2.7% and China 3%. Hence the Liberation Day announcement chart was quite ridiculous. But, then as president of the largest economy in the world, there was no questioning him. The only country that stood up was China, which imposed similar duties on American goods, and this caused a temporary peace with the dateline being pushed forward.

Now, Trump has gone through with his tariff deals overruling courts and without bothering to get sanction from the Congress. More importantly, normally any such policy would have worked out various numbers in terms of impact on growth, inflation, trade, employment and so on. But this was probably never prepared, let alone presented, as he has assumed that his wisdom is better than that of others put together. In fact, one can remember the Covid period when he had actually said that people should drink insecticide to kill the virus, which was ridiculous and dangerous.

The president has come up with a number of $600 billion a year as additional revenue that would be generated through higher tariffs on an annual basis. This, he has argued, will let all those with less than $200,000 of taxable income be free from taxation. This is a compelling argument, provided it works out. But both historically and theoretically, tariffs are seldom used for raising resources, as this would also mean that at the end of the day someone has to pay higher prices, which will be both the exporter and final consumer.

A major conundrum that Trump has posed to producers as well as importers in the USA is what to assume as being the final stance on tariffs. There have been several changes in the structures and the articulation has added to the confusion. Where should they be shifting their production locations? Christmas is just a few months away, which is also the biggest spending season in the USA. The small businesses have made representation that their inputs should be exempt from these tariffs as this will make their production processes unviable. They would be driven out of business, leading to increased unemployment. And today they are also not quite sure how long will the Trump tariff package last. Investment will now be hit the most as there is no clarity in the so-called ‘deals’ firmed up with various countries.

Coggan dissects Trump’s pet justification of America being ‘ripped off’ and ‘pillaged’ by the world. He starts with the argument as to why does USA import goods? The answer is simply because they are cheaper. America can also produce garments, but Vietnam and Bangladesh sell much cheaper mainly due to lower labour costs. He draws the analogy of a mom-and-pop store complaining that the supermarket next door is ‘pillaging’ the business by selling at lower costs! There can be no counter-argument here.

What can be the damage to the American economy? Here the author quotes an IMF paper which shows that an increase in tariffs by 3.6% can reduce growth by 0.4% over five years. This is a study for 151 countries. Now, with USA increasing tariffs by substantially more than 3.6% given that the base level is fixed at 10%, the impact can be catastrophic on growth. This happens due to four factors. First, labour moves over to less productive sectors that are protected by tariffs. Second, exports become less competitive as the currency is pushed up. Third, MNCs will see their cost of inputs increase substantially, and finally, economic activity will speed up before the tariffs are imposed but then slow down sharply subsequently (the book covers all aspects till July).

Coggan also talks of the employment effect. When it comes to low-skilled employment, US manufacturers face a problem of higher costs in making them in the country. Motorola had to shut down 12 months after opening a factory due to higher labour costs as average pay was twice that of China and six times of Vietnam. The same argument holds in textiles and metals where Asia has a distinct advantage. But employment has increased in high skill and margin businesses like pharma where there is a distinct advantage. Yale has calculated that this tax will lead to 0.4% increase in unemployment and GDP growth to be lower by 0.7%. 

Another thinktank has estimated that after-tax income of individuals will reduce by $1183 per household in 2025, or 11.%.Coggan summarises the entire exercise as ‘nailing jelly to the wall’. The number of changes made and the direction reversal during the course of writing this book made it extremely challenging. A question which the reader can genuinely ask is, when all this is so clear to everyone, why has Mr Trump not absorbed the same. Here, the author quotes from the popular book of 1925, The Great Gatsby: “And many billionaires in his coterie can cause vast destruction to the economy and then retreat back to their privileged lives. They will always be fine. As a corollary, others have to clear the mess.”

More than satisfying: Financial Express 30th August 2025

 The GDP growth figure for Q1 was eagerly awaited for several reasons. First, in light of the tariff trauma inflicted by the US on India, this number was going to be important even though the decision has been implemented only in late August. Second, it will be a major lever for the Reserve Bank of India (RBI) when it takes a decision on the repo rate. The direction of policy has changed from inflation to growth in the past few policies and the 7.8% number definitely does not indicate any weakness. Third, given the final growth projection of around 6.5% for the year, it will provide a cushion to any downside in the coming quarters.

The performance has been more than satisfying as growth is broad-based in all the services segments, and two in the secondary sector grew at impressive rates. Agriculture has provided the expected support while mining and electricity have been the low performers, which was expected as the growth numbers mirror what was already known in the index of industrial production (IIP) numbers for this quarter. Hopes are high of a recovery in urban demand this festival season with the government also likely to take some affirmative steps.

One of the major contributors to manufacturing growth has been a steady increase in profits, notwithstanding a lower IIP growth. In fact, the highlight of corporate performance was lower growth in turnover mainly due to the urban consumption challenge, but smart rise in profits which is a major part of the concept of value added. If one were to look ahead, the scenario is one which can be “stable to better”. The reason is that the element that can drive manufacturing is expected to be consumption, where the government has already given a boost through income tax relief. The goods and services tax (GST) cuts should come into effect next month, which will also help boost consumption. Nominal consumption grew by 9.1% this quarter, and it should get better to support growth at a time when inflation is rather low. The monsoon has been good and augurs well for rural consumption too. The investment rate has also been stable this quarter at 30.4%, which can improve gradually as consumption picks up.

Construction has been another star performer with a growth of 7.6%. The contribution has come from both the government focus on infrastructure as well as the housing sector. The latter has witnessed signs of revival, which can be expected to sustain, if it is not bettered, during the festival season when individuals normally buy homes.

The services sector has once again been the engine for growth. Given that ours’ is a services-driven economy, a lot of support comes from this segment. In fact, it has to counter the repercussions of tariffs, which is likely on manufacturing. Trade, transport, etc. clocked growth of 8.6% as consumer spending continued to be brisk with “experience” still being a driving factor. The boom in e-commerce and retailing has also contributed to the growth. And a greater use of phones and internet has increased output from the communications segment.

The financial sector continued to register swift growth of 9.5% in line with that in deposits and credit. This may remain stable for the next couple of quarters as growth in credit is expected to pick up in the busy season. Similarly for public administration and defence services, 9.8% growth over 9% last year is impressive as the government has been on target with spending both at the central and state levels.

A point of curiosity that will be nagging the reader is that while the direction all these segments took was on expected lines, the numbers have been high. This can be explained by the way in which GDP numbers are reckoned. All numbers are generally calculated in current prices that are available. These numbers are then scaled down based on price deflators. These deflators tend to be the wholesale price index (WPI) in most cases. This has to be done to convert nominal numbers to real. This year, the WPI has tended to be either very low or negative. This comes out from the growth in nominal GDP which was 8.8% this quarter—just 1% higher than the real GDP growth. Normally these two numbers have a difference of 3-4%. Given that inflation is expected to be benign and low for at least Q2 and Q3, there would be a tendency for an upward bias in the real GDP growth numbers.

All this also means that achieving the 6.5% growth number, which the RBI has projected for the year (at the time of forecast it did not take into account the additional 25% tariff imposed by the US), is possible. Tax benefits have been granted to individuals on income and a similar benefit is expected from GST. Both will aid domestic demand, which is now crucial for steadying the boat assuming that exports to the US will take a hit due to the tariffs (likely to materialise after three-four months). With expectations of a normal monsoon, kharif production—which is a good proxy for potential rural spending—seems to be on course. Therefore, this is a good augury.

The next question is, how will the Monetary Policy Committee look at this number? If there will be an upward bias due to the deflators in the coming quarters too, then the overall GDP growth will definitely be one which may not cause concern. Besides, the transmission of past actions is still on with the cash reserve ratio cut to be invoked from September onwards. It may be tricky to support a rate cut at this time based on growth numbers—either of Q1 or the full year. Yet the tariff impact on the micro, small, and medium enterprise sector in particular will always be on the radar. It would be an interesting call nonetheless.

To ban or not to ban: Financial Express 22nd August 2025

 https://eikona.mediatrack360.com/Print/330/3321819

BBB effect: India's S & P rating upgrade should cheapen loans and ....MInt 20th August 2025

 https://www.livemint.com/opinion/online-views/standard-poor-s-moody-s-fitch-india-sovereign-rating-fiscal-deficit-debt-to-gdp-indian-gdp-growth-foreign-direct-i-11755510788746.html