GST 2.0: Historic reform or delayed fix? Political, economic angles decoded

Capital Beat brought together economist Santosh Mehrotra, senior journalist Girish Joshi, and political analyst Siddharta Sharma to examine the GST Council’s sweeping decision to collapse four tax slabs into two – 5 per cent and 18 per cent.

The discussion centered on whether the reform is a true Diwali bonanza for the middle class or a delayed correction to long-standing economic missteps.

Concerns over timing and policy design

Mehrotra emphasised that the reform was long overdue, echoing former Finance Minister P Chidambaram’s critique that it had come “eight years too late”. He pointed out: “The illiteracy of the policymakers is unbelievable. Chidambaram’s analysis and questions are absolutely spot on. It’s a combination of sluggish growth, rising household debt, falling savings, and elections.”

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He underlined that inflation had eroded real wages for over a decade, while job growth in the non-farm sector stagnated. He also flagged reverse migration into agriculture, with women forced back into unpaid family labour. “The number of young educated women wanting city jobs has risen, but jobs are not getting created. Private investors are leaving the country. Consumption is being maintained by people borrowing against gold or personal loans.”

Mehrotra described the situation as tragic, noting that GST revenues as a share of GDP only returned in 2024 to the levels seen before its launch in 2017. “It is a catastrophe, eight lost years on account of GST,” he said.

Foreign players and hidden signals

Girish Joshi turned the focus to the political economy of the reform, noting the unusual silence of the Opposition. “I was astonished to see that the Opposition, after agreeing to all this...nobody came and said that this is wrong. Actually, we like to congratulate the Opposition because they have silently agreed.”

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He suggested that the higher 40% slab, covering items like soft drinks, tobacco, and luxury cars, carried a strategic message. “The cold drink market is 60% controlled by Coca-Cola and 30% by Pepsi. With 40% GST, American companies holding 90% of the market are going to take that hit. This may be a message before hosting the BRICS meeting, showing that if you bully us with tariffs, we can retaliate.”

Joshi added that multinational fast-food chains like McDonald’s, Starbucks, Domino’s, Pizza Hut, and KFC could also be impacted. He tied the move both to electoral calculations and to counter-tariff signaling toward the United States. “Bringing essential services and FMCG below 5% is one angle, but politically this government does not act unless compelled or pressured.”

Admission of failure?

Siddharta Sharma characterised the slab rationalisation as an implicit acknowledgment of the failure of GST’s original design. “If I reform something, I redo something, that essentially is an admission that whatever I did earlier was wrong. GST was not a masterstroke, it was a master blunder.”

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He argued that household savings had declined sharply, leaving families unable to benefit even from reduced prices. “Indian household savings fell from 24% in 2005 to less than 18% in 2024. Borrowings per family have doubled from ₹1.8 lakh in 2019 to nearly ₹4 lakh today. A person burdened by debt cannot afford more consumption, whether GST is 40% or 5%.”

Sharma highlighted that states had also suffered heavy losses under GST. Maharashtra reported losses of ₹32,000 crore, Karnataka ₹33,000 crore, Gujarat ₹25,000 crore, and Tamil Nadu ₹24,000 crore. “The states are getting poorer while the Centre has muffled GST profits to itself. This model does not work,” he said.

Fiscal losses and weak consumption

Mehrotra assessed the fiscal implications, noting that government estimates projected an annual revenue loss of ₹48,000 crore from the reform. “Since half the year is past, we are talking about around ₹22,000 crore this year. The government is hoping demand will rise, but as with the personal income tax cut earlier this year, it has not yet translated into higher consumption.”

He detailed how banks had increased lending to individuals as industries refrained from borrowing due to weak demand. “Industry doesn’t have confidence to invest in new plants. Jobs are not being created. Instead, middle-class families have taken personal loans and rural households gold loans. With gold prices rising, many are defaulting and losing assets.”

Mehrotra concluded that lower GST rates were unlikely to spark significant demand. “People will just absorb these lower prices. Petrol remains high, EV penetration is limited, and the vast majority have no capacity to pay.”

Political stakes in Bihar elections

As Bihar heads to polls, Joshi questioned whether the GST move could offset the Opposition’s “vote chori” campaign. “The people of Bihar are very enlightened. They discuss every political angle. Giving all these drumsticks for playing is not going to work. Once they have done the cheating, this message is not going to travel well.”

He argued that only select industries like garments, shoes, and pharmaceuticals would benefit from reduced GST rates. “Unless you put money in people’s pockets, the consumer market is not going to go up. Whatever companies cannot export will find breathing space in the domestic market, but demand will not rise without income growth.”

Joshi stressed that the electorate had not forgotten their hardships during the pandemic. “People know how much they were paid during Covid, what happened with MGNREGA, and how operators siphoned money. This GST matter is not going to change that.”

GST 2.0 as a band-aid measure

For Siddharta Sharma, the reform was no more than a temporary patch. “You cannot treat a big wound with a band-aid. Reducing GST reduces cost but does not increase earnings. People of India want to earn more. A poor person wants to earn more, a company wants to earn more. This GST regime is not directed toward increasing earnings.”

He warned of risks even to the BJP’s core voter base. “If indeed this 40% super sin tax is applied on things like Pepsi, Coke, and McDonald’s, please understand that customer base is BJP’s core voters. How would they react? Earnings are not increasing even for them. BJP should be very worried.”

Echoing Mehrotra, Sharma concluded: “This is unt ke muh mein jeera ('cumin in a camel's mouth', alluding to gross inadequacy) — too little too late. A patient needs medicine, not tonic. The government’s move is unlikely to revive demand or confidence.”

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