The GST 2.0 regime, despite involving an average revenue loss of ₹85,000 crore, is estimated to have boosted consumption by ₹1.98 lakh crore. Combined with income tax cuts, the total impact amounts to an additional ₹5.31 lakh crore of consumption expenditure, or about 1.6% of GDP, the report said.
SBI Research estimates the GST-induced consumption boost at around 0.6%. To assess the demand-side effect of the ₹85,000 crore GST revenue shortfall in FY25, the reduction in indirect taxes borne by households and firms is treated as an effective rise in disposable income. A decline in GST collections lowers the tax wedge, raising purchasing power. Using the Keynesian tax multiplier, this translates into a measurable stimulus to aggregate demand.
The process operates in two stages. In the first round, households spend a fraction of the tax cut equal to their marginal propensity to consume (MPC). With MPC at 0.7, the initial consumption injection is estimated at ₹70,000 crore. This direct spending then triggers further induced rounds of consumption.
The report pegs the tax multiplier at 2.33, resulting in a total demand boost of about ₹1.98 lakh crore. “For every rupee of lost GST revenue, household purchasing power rises significantly, which then propagates through the economy before potential leakages via imports,” SBI noted.
In FY26, measures introduced have lifted household demand by channeling foregone revenues into private consumption. The income tax rate cut alone, which entailed a revenue loss of ₹1 lakh crore, added around ₹3.33 lakh crore of consumer spending. On the indirect tax side, GST 2.0 contributed another ₹1.98 lakh crore. Together, these measures generated ₹5.31 lakh crore of additional consumption expenditure, or about 1.6% of GDP.
This underscores the role of calibrated tax policy in stimulating demand. While direct tax cuts support household incomes, broad-based indirect tax reforms like GST 2.0 appear to have a deeper and more immediate effect on consumption.
The government has, therefore, incurred revenue losses on both fronts—direct taxes through income tax cuts and indirect taxes via GST 2.0 adjustments. However, SBI Research notes that these foregone revenues are effectively boosting household purchasing power, providing timely support to aggregate demand.
On the fiscal side, SBI Research notes that the impact on the FY26 deficit could be minimal or nonexistent. The annual revenue loss is estimated at around ₹1.1 lakh crore under Scenario 1 and ₹60,000 crore under Scenario 2. For the second half of FY26 (October–March), the projected loss is about ₹45,000 crore.
Ordinarily, such a loss could push up the fiscal deficit by 10 basis points. However, the balance in the compensation cess—around ₹45,000 crore—offers partial relief. Since this cess is shared equally between states, about ₹22,500 crore could be adjusted, leaving a net revenue loss of ₹22,550 crore for the Centre, which would add only 5 basis points to the fiscal deficit.
Even without cess adjustment, the ₹45,000 crore shortfall could be more than offset by higher GST collections post-rate cuts. With consumption expected to rise by ₹5.5 lakh crore and an effective tax rate of roughly 9.5%, the government could gain around ₹52,000 crore in additional GST revenues. This would be equally shared between Centre and States, giving the Centre about ₹26,000 crore. Notably, the Centre has already exceeded projected tax revenues by ₹2.26 trillion over the past four years.
Therefore, the overall impact on the FY26 fiscal deficit is expected to be minimal or negligible.
