New Delhi [India], September 10 : Consumption in India is expected to register a net gain of nearly Rs 1 lakh crore from September onwards, driven by the recent Goods and Services Tax (GST) rationalisation, according to a report by Bank of Baroda.
The report estimated that the net gain to consumption would be in the range of Rs 0.7-1 lakh crore, which amounts to around 0.2-0.3 per cent of the country's GDP.
It stated "We estimate the net gain to consumption of ~ Rs 0.7-1 lakh crore which amounts to ~ 0.2-0.3% of GDP, (anticipated from Sep onwards)".
It added that the impact could be even higher as the savings made by consumers from reduced cess may also translate into higher demand.
The rationalisation has kept most daily household items, including fast-moving consumer goods (FMCG) and durables, in the 5 per cent GST bracket, thereby lowering the overall effective tax rate.
Currently, the effective GST rate on consumption is estimated at 10-11 per cent. Considering the entire consumption profile, the taxable consumption group is expected to be around Rs 150-160 lakh crore.
This number could rise once fresh data on GST collection proportions becomes available.
The report also mentioned that the move is also expected to bring down inflation. It noted that the inflationary impact would be in the range of 55-75 basis points (bps).
For food and beverages, which account for around 9 per cent of the CPI basket, this could lead to a 25-35 bps fall in inflation over the next six months.
Prepared meals, snacks, oils, and fats are likely to see a drop in prices due to reduced rates on items such as butter and vanaspati.
Since these are everyday consumables, the price fall is expected to give a strong push to real consumption demand, which in turn could support fresh investment.
Core inflation is also set to benefit. The report highlighted that around 10 per cent of the core inflation basket would gain from the lower GST rates.
Prices in this category are expected to fall by an average of 7.4 per cent, which could reduce core inflation by 30-40 bps in the next six months.
It stated "we revise downward our current estimate of headline CPI to 3.1 per cent from our previous forecast of 3.5 per cent".
Overall, the report stated that the GST rationalisation will not only ease inflationary pressures but also give a significant push to household consumption and investments in the economy.