Fiscal measures take center stage to boost India’s growth
With the Monetary Policy Committee having initiated reductions in the policy interest rate and Cash Reserve Ratio (CRR), the focus has now squarely shifted to fiscal measures aimed at stimulating consumption and boosting economic growth. Three critical avenues are currently under consideration: rationalization of GST rates, a reduction in borrowing costs, and a re-organization of states’ capital expenditure.
A meeting of the GST Council is anticipated shortly, with strong indications that it will deliberate on rate restructuring. The current GST framework is characterized by four general rates (5, 12, 18, and 28 percent), alongside multiple special rates (0, 0.25, 3 percent) and a compensation cess (1-22 percent) on selected items. A Group of Ministers (GoM) is actively reviewing this structure, and while their report is yet to be submitted, there is a strong likelihood that the Council will aim to reduce the number of rates and potentially lower taxes on some items.
Paras Jasrai, Senior Analyst with India Ratings & Research (Ind-Ra), believes that the four-tier GST structure has made the tax structure complex along with compliance burdens and disputed claims. He advocates a more streamlined approach, stating: “There should be the merger of the 12 per cent slab into 5 per cent and 18 per cent rates, which would help in streamlining processes, reduce litigation, and enhance revenue efficiency.”
Jasrai further suggests a strategic approach for policy certainty: “For building policy certainty, the government can announce staggered reduction of tax slabs in a phased manner (with endline for phasing out the highest tax slab). This would enhance trust and improve tax collections for the government.”
The GST Council finds itself in a comfortable position to consider such reforms, given the robust growth in GST collections, which have exceeded ₹2 lakh crore in two successive months. This strong GST collection, coupled with healthy growth in direct taxes and a higher-than-estimated surplus transfer from the RBI, could enable the government to reduce not only its cost of borrowing but also its overall borrowing.
Debt managers are optimistic that the average cost of government borrowing could fall below the 7 percent level in FY26, after remaining at or above this mark for the preceding three years. RBI data indicates that the cost of government borrowing (represented by the weighted average yield on government debt issuances) decreased to 7 percent in FY25, from 7.20 percent in FY24 and 7.30 percent in FY23.
Sunil Kumar Sinha, Professor at the Institute for Development and Communication, offers a perspective on the immediate benefits of this financial maneuver, noting: “while the lower cost of borrowing will help in coming years, immediate gain would be through additional liquidity through combination of higher revenue receipts and lower borrowing.”
He suggests a direct application for this enhanced liquidity, proposing that this additional money can be used to provide more to States under fifty-year interest-free loan for capital expenditure. Sinha underscores the effectiveness of this approach, explaining that capex expenditure by States has lower gestation period than Centre. Also, it will boost consumption in states.
Expanding on the broader fiscal strategy, Ranen Banerjee, Partner with PwC India, highlights the continued governmental support through “the high capex allocations and focus on productive expenditure in the budget.” He emphasizes the crucial role of state governments in this economic push: “The state governments have to also align to the fiscal roadmap that the centre has been following with higher capex and productive expenditure allocations.” Banerjee also pinpoints an area for future reform at the state level: “The next gen reforms on ease of doing business at the state level focusing on decriminalisation and optimal regulation to bring down cost of doing business for manufacturing small and medium enterprises should be prioritized.”
Published on June 8, 2025
