GST 2.0 Shifts India’s Growth Strategy from Highways to Homes

The government’s overhaul of the goods and services tax is not merely a technical exercise in simplification. By collapsing four slabs into two and withdrawing the compensation cess, New Delhi is signalling a deeper philosophical shift from leaning on public capital expenditure to betting on household consumption as the next driver of growth. 

For much of the past decade, policy has prioritised supply-side measures: record infrastructure spending and incentives to lure private investment. Yet the expected investment cycle has remained subdued. Corporate balance sheets are cautious, job creation has lagged, and households face one of the steepest indirect tax burdens among emerging economies.

GST 2.0 responds by redistributing fiscal space towards consumption. Essentials and durables now attract lower tax rates, while luxury and sin goods are penalised with a steep 40% levy. Nearly 0.6% of GDP is effectively channelled back into households, with autos, consumer durables, FMCG and healthcare emerging as winners.

Revenue Dilemmas

The reset is not without fiscal consequence. Even after higher rates on luxury categories, the government concedes a net revenue loss of about 0.14% of GDP, or ₹480 billion. With compensation cess, worth nearly 0.5% of GDP, also phased out, the GST reform acts as a de facto stimulus. Funds once ring-fenced for debt redemption and off-budget flows are now unlocked for demand. Households, not highways, become the centrepiece of strategy.

Why now? Partly because revenue buoyancy has faltered. Gross tax receipts in the first four months of 2025-26 are well below the Budget target, raising doubts about achieving a 13% full-year increase. The state is patching gaps with higher dividends from the Reserve Bank of India and public sector undertakings, alongside divestment drives. Such buffers are not sustainable. Meanwhile, the political calculus demands visible respite for households amid rising costs. With external demand slowing and elections concluded, the government has placed its wager on the domestic consumer.

The equity argument is also compelling. Indirect taxes are inherently regressive. By compressing slabs from four to two, and cutting rates on key consumption items, GST 2.0 makes the system less distortionary. Sectors plagued by inverted duty structures, such as consumer durables, gain clarity. The simplification could also ease compliance burdens for firms, though the full effect will only be visible with time.

Yet the rebalancing carries risks. Public capital expenditure has been a stabiliser in recent years, cushioning the economy through global shocks. Curtailing it to balance lower tax revenues could blunt longer-term productivity gains. States, which already face slowing tax receipts, may find their fiscal room squeezed further once cess revenues disappear. For them, GST 2.0 is not just a simplification but a test of resilience.

Sectoral effects underscore the tilt. Mass consumption goods, from entry-level two-wheelers to footwear, appliances and affordable healthcare, stand to benefit. Hospitals, insurers, apparel and quick-service restaurants are poised for a revival. But upstream industries such as oil, gas, coal-linked power, and luxury automobiles will carry heavier burdens. The balance of advantage shifts decisively towards households and away from capital-heavy sectors.

If GST 1.0 in 2017 was about creating a unified market, GST 2.0 is about redefining India’s growth model. It elevates the consumer above the contractor. The gamble is that stronger domestic demand will create a multiplier large enough to offset fiscal drag and sustain momentum.

Whether that gamble pays off will depend on execution. Simplification must not become a substitute for investment in infrastructure, education and healthcare, which remain the real engines of long-term productivity. A consumption boost can light a fire under demand, but only investment can sustain it. Policymakers must therefore guard against allowing the consumption pivot to crowd out the foundations of future growth.

GST 2.0 will be remembered less for the mechanics of its rate structure than for what it represents: a conscious recalibration of India’s development strategy. For the first time in years, households are being asked to drive the economy. Whether that leads to inclusive and sustainable growth will determine the success of this tax reset.

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