Goods and Services Tax (GST) cuts are set to bolster domestic demand by easing the tax burden on consumers and businesses, spurring consumption and investment across sectors, and supporting job creation, the finance ministry said in its monthly economic review for September, released on Monday.
A strong performance in industry and services, along with a stable labour market, is expected to reinforce this momentum, the ministry noted. However, it cautioned that persistent global uncertainties could weigh on exports and external demand, posing downside risks to growth.
The report added that ongoing structural reforms and new government initiatives, including the roll-out of GST 2.0, are expected to cushion the economy against these challenges.
The recent GST overhaul, which took effect on 22 September, cut the number of slabs from four to two – a 5% rate on essential goods and an 18% standard rate for most others – while retaining a 40% rate for luxury and ‘sin’ items such as cigarettes.
India’s economy has surpassed expectations so far in FY26, with GDP growing 7.8% in the first quarter on the back of resilient domestic demand and strong investment momentum.
The review said household consumption and private investment have remained strong, underpinning growth that is likely to carry through the second half of the fiscal year.
What about inflation?
Meanwhile, the ministry said it expected inflationary pressures to remain subdued in the coming months.
The Reserve Bank of India (RBI), which has kept the repo rate unchanged at 5.5% with a neutral stance, cut its inflation forecast for FY26 to 2.6%, from 3.7% projected in June and 3.1% in August.
Inflation is expected to average 1.8% in the third quarter before inching up in the final quarter, according to the latest review. Core inflation is likely to stay soft, the ministry said, helped by GST rationalisation and stable commodity prices.
Agriculture, too, continues to lend support to rural demand, with the kharif sowing completed successfully and cereals and pulses recording healthy gains on the back of favourable weather.
While oilseeds and cash crops saw lower acreage and some weather-related losses, the overall outlook for food production remains positive, reinforcing rural incomes and market stability, the ministry added.
Confidence in fundamentals
On the financial side, the ministry noted that overall funding to the commercial sector continues to expand even as bank credit growth has moderated.
Non-bank sources are playing a larger role in financing, while the RBI’s latest regulatory measures are expected to enhance credit efficiency, strengthen the banking system, and deepen India’s integration with global capital markets, the ministry said.
“The full implementation of the RBI’s latest developmental and regulatory policies is anticipated to enhance the efficiency of credit allocation, strengthen the resilience of the banking sector, and facilitate the economy’s integration into global financial markets under more favourable conditions,” it added.
The upbeat tone underscores New Delhi’s confidence in domestic fundamentals even as global trade frictions, monetary tightening abroad, and geopolitical tensions cloud the external environment.
Domestic demand is expected to remain the key driver of growth, the latest monthly economic review said, adding that fiscal and monetary conditions remain conducive to sustaining momentum through FY26.
“The growth outlook for FY26 remains strong, supported by domestic demand, favourable monsoon conditions, lower inflation, monetary easing, and the positive effects of GST reforms,” it added.
