While the reform is expected to immediately boost private consumption, its deeper significance may lie in its potential to solve a far more stubborn problem: India's decade-long decline in private investment.

This revised GST framework isn't just a sugar rush for consumption; it's a strategic move to create a virtuous cycle where robust demand finally tempts hesitant capital off the sidelines, marking a structural shift for the economy. 

Since its peak in 2011, India's private investment engine has been sputtering. Gross Fixed Capital Formation (GFCF) by the private sector as a percentage of GDP has fallen from a high of 31% in 2011-12 to around 26% in 2023-24. Public investment has stepped in to fill the void, with public GFCF now accounting for over 30% of total GFCF, up from less than 20% in 2013-14. 

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Despite the 2019 corporate tax rate cut from 30% to 22%, private investment failed to rebound due to weak consumer demand after the demonetization and pandemic shocks, high corporate leverage and risk aversion and global supply chain disruptions. Frequent policy changes added uncertainty, while low-capacity utilization discouraged new projects.

Additionally, the high levels of non-performing assets (NPAs) of Indian banks, peaking at 11.5% in March 2018, significantly constrained credit flows to non-financial sectors. Credit growth for industrial sectors stood at 4.4% as of November 2024.

The persistence of elevated asset quality risks and cautious risk appetite among banks remained an important factor constraining private investment. 

Sustainable long-term growth requires both engines—consumption and investment—to fire. You cannot have a durable consumption boom without simultaneously creating new capacity, new factories and new jobs.

The decline in investment is precisely why past consumption spurts, often fuelled by government spending, have fizzled out. They lacked a parallel private sector response, creating inflationary pressures instead of sustainable growth.

This is where the GST review could move from being just a consumer-centric stimulus to a growth-centric structural reform. It directly addresses a key reason for low private investment. By resolving inverted duty structures that trap working capital, it unlocks funds for capacity expansion and tech upgrades.

More importantly, lower rates on goods like appliances, automobiles and durables would permanently raise baseline demand, giving CEOs the confidence of long-term consumption visibility rather than a one-off spike.  

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GST 2.0 doesn't simply lower rates, it simplifies the entire indirect tax architecture. By setting moderate rates, the reform reduces the incentive for tax evasion and avoidance, encouraging greater compliance. As more businesses enter the formal economy, the tax net broadens, expanding total revenue even at lower headline rates. 

This self-reinforcing cycle is the definition of a structural change. The economy won't just move to a higher level of consumption; it will activate its somnolent investment engine to create new capacities, thereby sustaining a higher level of consumption.  

The simplified structure incentivizes businesses to formalize operations and maintain compliance. If executed well, GST 2.0 could raise GDP by as much as 2% (NCAER), while maintaining robust revenue growth to fund public priorities. 

The revenue momentum supports this optimistic projection. In 2024-25, GST recorded its highest-ever gross collection at ₹22.08 trillion, a growth of 9.4% over the previous year, with an average monthly collection of ₹1.84 trillion.  

The consumption-GDP growth nexus: India's economic architecture is uniquely placed to benefit from consumption-driven growth. More than 60% of India's GDP is driven by domestic consumption, making the country the world's fourth-largest consumer market (WEF). 

At the same time, simplified tax compliance eases this burden on businesses, allowing them to redirect resources toward capacity expansion and hopefully also research and development (R&D). 

Moreover, uniform tax treatment across states reduces inter-state arbitrage and improves resource allocation, enabling regional convergence and higher overall productivity. Together, these dynamics should ensure that the consumption boost from GST reforms will translate into long-term economic gains.

Critics might argue that consumption boosts from tax changes are temporary, as consumers eventually adjust to new price levels. However, this view misunderstands the nature of structural reforms. The key difference lies in systemic versus one-time changes. 

A simple tax rate cut might indeed provide temporary relief. But comprehensive structural reform—eliminating complexity, improving compliance and enhancing transparency—creates permanent institutional advantages that sustain growth. 

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The path forward: The GST Council, chaired by the Finance Minister and comprising state finance ministers, will convene by October to implement the proposed changes. Ensuring success will demand coordinated action across multiple dimensions. Technology integration will be essential to support the simplified structure while maintaining strong compliance monitoring.

Equally important will be stakeholder education so that businesses and consumers fully understand the new procedures and benefits. Finally, effective state coordination through well-designed revenue-sharing mechanisms will be critical to guarantee that states gain from higher consumption without compromising their fiscal autonomy 

A permanent transformation:Prime Minister Modi's GST reform announcement represents more than policy adjustment; it's a redesign of the economic architecture. These next-generation reforms promise to deliver more sustainable results by addressing structural issues that constrained the original GST implementation. 

The combination of rate simplification, compliance improvement and administrative efficiency creates multiple reinforcing mechanisms that will sustain higher consumption and private investment levels. 

As we approach Diwali, by when GST reform is to be implemented, India should seize the opportunity to give itself an investor friendly ecosystem that is growth-oriented and helps Indian youth prosper.

The authors are, respectively, chairman, Pahle India Foundation and former vice chairman, Niti Aayog; and a senior fellow, Pahle India Foundation.