GST cuts hailed as growth booster, but RBI risks ignoring warning signs

Other factors listed as favourable for an uptick in growth are peripheral and the usual ones. Those include robust manufacturing and services, conducive financial conditions, healthy corporate balance sheets, and above-normal monsoons, among others.

A new factor, “considerable moderation in headline inflation (CPI)”, has been added after CPI inflation dipped to 77-month low of 2.1 per cent in June 2025. Further, the bulletin says, the GST 2.0 is likely to have a “sobering impact on inflation”.

A closer look, however, reveals that the RBI bulletin’s analysis is superficial. Here is why.

Structural reforms

There is repeated reference to “structural reforms, including GST 2.0” as a magic bullet that would “support momentum in domestic demand and output”. This phrase essentially means the GST rate cuts that came into effect from September 22 – at the end of H1 of FY26.

The bulletin spells out other “structural reforms” only once. Those are seven in numbers.

Five of these structural reforms are long-term projects which will bring results several years down the line, not in FY26: National Deepwater Exploration Mission, Task Force for Next-Generation Reforms, Opening Nuclear Sector to Private Players, National Critical Minerals Mission and High-Powered Demography Mission.

Also read: India’s steel sector faces headwinds due to cheap imports, dumping: RBI article

The “high-powered demography mission”, when it comes into effect, is more likely to hurt the economy, being a divisive social and economic agenda aimed at isolating the Muslims who constitute 14 per cent of the population (2011 Census).

PLI and ELI

The rest two are ongoing schemes: PLI for semiconductors, launched in 2021 and PM Viksit Bharat Rozgar Yojana (PM-VBRY) or the Employment Linked Incentive (ELI) scheme, launched on June 1, 2025.

The PLI for semiconductors was launched in 2021. In the past 10 days, only two of the 10 semiconductor projects, Kaynes Semicon and CG Semi, became operational. According to Veer Sagar, chairman of the Electronic and Software Export Promotion Council (ESEPC), these are “low-end” chips on the trial run at present, it would take at least six months before they could be rolled out for commercial use – sometime in FY27.

The other, the ELI scheme, is meant to create jobs and provides for cash handouts of ₹15,000 a year for two years to the newly hired and also cash handout of ₹1,000-3,000 a month to their employers (₹12,000-36,000 a year) for their EPF liabilities. For manufacturing, the ELI would run for four years. There is no mention of creating permanent employment.

The Federal had earlier shown ('Why cash-rich India Inc could be bigger beneficiary of job scheme ELI') that the cash-rich India Inc doesn’t need the ELI cash handouts to create jobs.

Fall in EPF subscribers

It had also explained that two similar previous schemes – Aatmanirbhar Bharat Rozgar Yojana (ABRY) of 2020 and the PM-RPY in 2018 – didn’t seem to create permanent jobs because the EPFO data show both “new EPF subscribers” and “net payroll” have been falling.

“New EPF subscribers” fell from 13.9 million in FY19 (since when the full fiscal data is available) to 11.4 million in FY25. “Net payroll” kept rising from 6.1 million in FY19 to 13.9 million in FY23 and then started falling – to 13.1 million in FY24 and 13 million in FY25. This indicates that the jobs created seem to have disappeared once the cash handouts ran out.

The ELI may have a similarly temporary impact – at taxpayers’ expense, not private investment.

Profits up, not capex

The RBI bulletin hails India Inc for raising its profits nearly three times in four years – from ₹2.5 trillion in FY21 to ₹7.1 trillion in FY25 – despite “challenging conditions” that the pandemic of FY21 presented. This led to “net profit margins jumping to double-digit levels” in FY25, it adds.

Also read: Is RBI being overly optimistic in projecting 6.8 pc growth for FY26?

The Economic Survey of 2023-24 too had taken note of this sharp rise in corporate profits but called it out for neither investing enough in the economy nor producing quality jobs, despite “swimming in excess profits”. In December 2024, Chief Economic Advisor V Anantha Nageswaran called this “self-destructive” for corporates – as low investments and stagnated wages would suppress demand for their own products and services.

The RBI’s bulletin ignores such concerns and risks to growth.

Curiously, it pegs the “revival in private investment” as a key factor for higher growth in FY26. The other two factors it lists are, “early resolution of global trade related issues” and “sustained softening of global commodity prices”.

The RBI bulletins have been expressing hope for “revival” in private capex for several years.

Instead of reviving, private corporate capex continues its downward slide. From the peak of 16.8 per cent of GDP in FY08, it has gradually slid to 10.1 per cent in FY24 (both in current prices).

Slowing of bank credit outflows

The RBI bulletin also explains away slowing down bank credit outflows – another indicator of private investment – by repeating that “market-based, non-banking sources” of financing “more than made up” for such a moderation in H1 of FY26.

Its data show, growth in bank credit to non-food halved in FY25 to 11 per cent – from 20 per cent in FY24. In FY26 (April-August 2025), it fell to 2.1 per cent – from 3.1 per cent in the corresponding period of 2024.

While lauding India Inc for boosting profits (from ₹2.5 trillion in FY21 to ₹7.1 trillion in FY25), the RBI bulletin said this was “driven by manufacturing sector”.

Also read: RBI’s inflation targeting: Why flexibility should not undermine focus

Manufacturing is the flavour of policymakers since the ‘Make in India’ mission was launched in 2014. It received tax cut in 2019, the new manufacturing units attracting just 15 per cent tax.

Manufacturing keeps failing

The PLI subsidies were rolled out for manufacturing in 2021; the ELI is meant for all but “with special focus on the manufacturing sector” and so, manufacturing units will get the ELI handouts for four years – against two years for others.

But manufacturing continues to fail in output and job creations.

Manufacturing’s GVA share has actually fallen from 17.4 per cent in FY12 (pre-tax cut and PLI and ELI) to 13.9 per cent in FY25 (all in current prices).

Its job share has fallen from 12.1 per cent in 2017-18 to 11.4 per cent in 2023-24 (PLFS).

The Federal had earlier shown ('Why 'Swadeshi' chest-thumping falls flat against production numbers') that average growth in manufacturing output (manufacturing IIP) fell from 10 per cent during FY06-FY11 to 3.3 per cent during FY13-FY25.

Growth in production of eight ‘core’ sectors of electricity, coal, steel, cement, crude oil, refinery products, natural gas and fertilisers also fell during the same period – average growth in core sectors falling from 5.2 per cent during FY06-FY11 to 4 per cent during FY13-FY25.

The RBI bulletin ignores this too.

Deflation as growth driver

The RBI bulletin is projecting “considerable moderation in headline inflation (CPI)” as a growth driver, adding that the GST 2.0 is likely to have a “sobering impact on inflation”.

It notes that the CPI fell to 2.1 per cent in June and further to 1.6 per cent in July. Its projections for Q2 and Q3 of FY26 it 1.8 per cent each – before rising to 4 per cent in Q4.

The RBI Governor, who presented these data in the bulletin (and earlier after the MPC meeting), lists “considerable moderation in headline inflation (CPI)” and the “sobering impact on inflation” of the GST cuts as favourable to higher growth. However, he seems to ignore that deflation is an indication that demand is faltering.

In fact, the RBI’s mandate under the May 2016 amendment to the RBI Act of 1934, that brought in the MPC mechanism, is to keep the CPI inflation at 4 per cent with a tolerance band of ±2 per cent. If the RBI fails to do so for three consecutive quarters, it would mean “a failure” – requiring (“shall”) the RBI to “set out a report to the Central Government stating the reasons for failure to achieve the inflation target; remedial actions proposed to be taken by RBI; and an estimate of the time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions”.

Also read: Will GST rejig rewrite history, spur consumption and growth?

The RBI is already staring at two consecutive quarters of below 2 per cent inflation – 1.8 per cent each in Q2 and Q3 – and if the Governor’s wishes about the GST 2.0’s “sobering impact on inflation” comes true, the Q3 inflation would be lower than 2 per cent – a sign of its failure which will require it to explain itself to the Centre.

Above normal monsoon, a setback

Above normal monsoon, especially as it brings untimely and intense rain towards the fag end of it, will lead to lower crop yield – not a growth driver as the bulletin assumes.

Floods have damaged kharif crops in Punjab and Maharashtra. Punjab’s farms are covered in sand and these deposits are not removed quickly, it would delay rabi sowing and may lower the harvest. Now rains in Tamil Naud threatens its crops.

Further, kharif crop is likely to be low-yield throughout the country due to lack of fertilisers (stunts growth) for several months.

After briefly resuming supply, China has now suspended it until further notice. This will impact supply of both conventional fertilisers like urea and DAP and specialty fertilisers – adversely impacting the rabi yield.

US tariffs hit exports

The 50 per cent US tariffs cut down Indian exports to its most profitable market by 12 per cent in September – causing a loss of $740 million.

In 2024, India exported $87 billion of goods in 2024, which generated $48.5 billion surplus.

Imagine the damage the US tariffs can do to India but the RBI bulletin underestimates it.

This is when India is desperately seeking to lower the US tariff. President Donald Trump’s assertion that the Prime Minister has assured him to cut down importing Russian crude on early Thursday (October 23) morning sent the capital market soaring – with the hope that the US tariffs may come down soon.

The trade logjam has also led to depreciation in the rupee. Reuters reported that the rupee fell by 3.7 per cent against the USD in H1 of FY26 – among the worst-performing Asian currencies. It also reported on October 17 that the rupee would have fallen further had it not been for the RBI’s “forceful intervention in the foreign exchange market”.

The RBI keeps the rupee value floating by offloading its USD reserve – a threat to the forex reserve. Besides, a depreciating rupee means rising import costs, rising interest burden of external commercial borrowings (ECB), and inflationary pressure – all posing risks to growth.

Deferred purchases not GST 2.0 gains

The GST cuts has seemingly improved consumer spending during the Diwali season (September 22- October 18) but a clearer picture would emerge later since several sectors like FMCG and automobiles have attributed the spike partly to deferred purchases between August 15 – when the Prime Minister announced the GST cut – and September 22 – when the rate cuts came into effect.

To sum up, the RBI’s excessive reliance on the GST cut to take growth up from 6.3 to 6.5 per cent in FY26 seems premature and an underestimation of multiple risks.