EY raises India’s FY26 growth forecast to 6.7% on GST 2.0 boost
EY raised India’s FY26 GDP growth forecast to 6.7% from 6.5%, attributing the revision to GST 2.0 reforms. These changes are expected to boost domestic demand and ease household budgets by consolidating tax rates. Despite global headwinds, strategic investments and trade diversification efforts are crucial for sustaining this growth momentum.
The firm’s Economy Watch September edition said the upward revision reflects expectations of monetary easing and stronger domestic demand from GST 2.0 reforms, despite global headwinds weighing on exports.
DK Srivastava, Chief Policy Advisor at EY India, said, “With GST 2.0 reforms boosting disposable incomes and domestic demand, and trade diversification efforts opening new opportunities, India is well positioned to sustain its growth momentum in FY26. Strategic investments in technology and targeted policy measures will be key to translating reforms into long-term economic gains.”
EY (formerly Ernst & Young) has revised its projection for India’s real GDP growth in fiscal year 2025-26 (FY26) upward from 6.5 % to 6.7 %.
The key driver cited for this upward revision is the implementation of “GST 2.0” reforms (i.e. changes in Goods & Services Tax structure) — which EY expects will stimulate demand and improve tax and compliance efficiencies.
EY’s confidence is bolstered by a strong first quarter (Q1 FY26) growth number of 7.8 % (year-on-year) — above what many had expected.
What is “GST 2.0” and how does it factor into the growth upgrade?
While EY does not fully elaborate every detail of GST 2.0 in the short piece, the key ideas and expected effects are as follows (drawn from the EY “Economy Watch” and commentary):
What GST 2.0 likely involves
Rationalization of GST rate slabs. EY mentions that under GST 2.0, rates have been rationalized around 5 %, 18 %, and a special 40 % category.
This re-structuring implies rate reductions for many goods and sectors, which may translate into lower post-tax prices for consumers.
Sectors that could benefit include textiles, consumer electronics, automobiles, health, and many food items (i.e. fairly broad, employment-intensive sectors)
On the supply-side, inputs such as fertilisers, agricultural machinery, renewable energy may see cost relief from lower GST on intermediate goods / inputs.
In the short run, there may be some “revenue impact” (i.e. loss or slower growth in tax collections) but EY expects that over time, increased demand and higher tax compliance will help recover revenue.
How GST 2.0 is expected to boost growth
1. Stimulating consumption demand
Lower tax burden (i.e. lower effective tax-inclusive prices) can raise purchasing power of households, especially in sectors that are tax-sensitive (consumer goods, automobiles, health). This could especially help in rural and lower-income segments.
2. Encouraging investment and production
Reduced cost of inputs, better clarity and rationalization of tax structure can improve incentives for industry to invest. Predictable tax rates reduce compliance costs and uncertainty.
3. Improving tax compliance, formalization
A simpler, more rational GST structure may deter tax evasion or distortions, leading to a broader base of taxable activity. Over time, that helps government revenue sustainably.
4. Multiplier & spillover effects
As consumption picks up, upstream industries (raw materials, logistics, intermediate goods) also gain. This spreads the benefit across the supply chain.
Because EY sees these structural reforms as giving a stronger tailwind, they have more confidence in a slightly higher growth trajectory.
The momentum so far: strong Q1 + signs in other indicators
EY’s optimism is not purely speculative; there are some supporting data points:
As noted, Q1 FY26 real GDP growth was 7.8 % — which is significantly higher than many had forecasted.
In the EY “Economy Watch (September 2025)” report, some other positive signals are:
Manufacturing PMI rose to 59.3 in August (its highest since February 2008)
Services PMI reached 62.9, its highest in many years.
Industrial production (IIP) growth improved to 3.5 % in July (from 1.5 % in June).
Government’s capital expenditure has grown very strongly (~ 32.8 % year-on-year in April–July period)
Tax revenues and indirect taxes (e.g. GST collections) have shown resilience.
These indicators suggest that the base is not weak, so a boost from GST reforms may help sustain momentum rather than act on a weak foundation.
Key assumptions and caveats (risks)
Whenever a forecast is revised upward, there are underlying assumptions and risks. EY is making a somewhat bold call, so it’s useful to scrutinize what could go wrong or limit the upside.
Key assumptions
Full/adequate implementation of GST 2.0:
The higher forecast assumes that the reform will be executed in a timely, clean, and effective way — including clarity in slabs, minimal disruption, and efficient administrative rollout. If there are delays, disputes, or implementation hiccups, the demand boost may be muted.
Recovery of revenue via improved base / compliance:
EY expects that initial revenue “losses” (due to tax cuts or rate rationalization) will be offset over time by demand expansion and compliance gains. That is crucial; if revenue does not rebound, fiscal space could be constrained.
Domestic demand remains resilient:
The forecast relies on underlying household demand, rural incomes, and consumption momentum to remain solid — i.e. not to be derailed by shocks (e.g. crop failures, inflation, interest rates).
External environment doesn’t worsen materially:
The global backdrop matters: trade tensions (e.g. US tariffs), supply chain disruptions, commodity price spikes, currency volatility — these can all exert drag on exports, inflation, and investor sentiment.
Policy support remains in place:
Continued capital expenditure by government, enabling monetary/fiscal stance, and structural reforms outside GST will help absorb headwinds.
Risks / headwinds
Export and trade headwinds:
One prominent risk is that elevated tariffs (for example, US imposing high tariffs on certain Indian exports) could weaken external demand. In fact, there is commentary in news that export prospects may be strained.
If export growth slows or reverses, the ripple effects (on factories, employment, investment) could partly offset domestic demand gains.
Inflation / cost pressures:
If commodity prices, energy costs, or input costs rise, that can erode disposable income and margins, thereby dampening consumption and investment impulses.
Fiscal constraints:
If tax revenue underperformance persists, the government may face pressure on deficits, forcing cutbacks or less aggressive capex — which would dampen growth.
Implementation risk / administrative burden:
GST reforms tend to require coordination across states, alignment of IT systems, dispute resolution, etc. If there’s confusion, litigation, or enforcement delays, businesses may take a wait-and-see approach, softening the demand shock.
Base effects / statistical distortions:
Some of the strong Q1 number might reflect favorable “deflator” effects (i.e. price adjustments) or favorable comparisons. It’s possible that some of this strength may not sustain over future quarters. Indeed, some economists caution that part of the Q1 surprise is “front-loaded government spending and soft deflator.”
Capacity or supply bottlenecks:
If demand surges faster than supply capacity (labour, infrastructure, logistics), inflation or supply chain constraints could become binding, causing “demand chokes.”
Implications and what to watch going forward
Given this upward revision by EY, several strategic implications and “monitorables” arise:
For policymakers
Ensuring smooth rollout of GST 2.0
The success of this forecast depends heavily on execution. The Centre and states must coordinate, streamline IT systems, settle disputes, and ensure clarity.
Fiscal prudence
Balancing short-term revenue loss against long-term gains will be delicate. The government must ensure it has enough buffers (e.g. revenue mobilization, rational subsidies) so that public investment is not squeezed.
Complements outside GST
GST is not a silver bullet. Reforms in land markets, labour, infrastructure, power, logistics all need to progress in parallel to maximize the impact.
For businesses & investors
Opportunities in tax-sensitive consumer sectors
Sectors such as automobiles, consumer electronics, textiles, health, and so on might see a stronger rebound than previously anticipated.
Input-cost sensitive industries
Businesses that depend on intermediate goods, machinery, or fertilisers may benefit from lower input tax, improving margins or incentivizing investment.
Export diversification
Given the risk of trade tensions, businesses would do well to diversify export destinations and reduce over-dependence on any single market. EY itself flags that India’s export destination and import source base is “narrow” and needs diversification.
Close monitoring of macro / policy risk
Investors should watch inflation, interest rate moves, fiscal deficit trends, and global headwinds as potential “weather” changes.
What to watch in upcoming data / signals
GST collections trends:
Will the revenue growth recover after the rationalization? Are collections still growing after adjusting for rate cuts?
Quarterly GDP trajectory beyond Q1:
If Q2, Q3, Q4 continue to register strong growth (or at least above 6 %), that supports the revised forecast.
Private consumption data:
Retail sales, FMCG indices, vehicle sales, household credit growth—these will indicate whether demand is truly recovering.
Capex / investment indicators:
Corporate investment announcements, capacity utilization, credit to industry, machinery imports. These indicate whether the supply side picks up.
Inflation & interest rates:
If inflation picks up beyond comfortable bounds, the Reserve Bank of India (RBI) might need to raise rates (or be less accommodative), which could dampen demand. Conversely, if inflation remains benign, there’s room for easing.
Global environment & trade policy signals:
News on U.S. tariffs, supply chain disruptions, commodity price shocks, and global demand trends will influence how much export drag there is.
My assessment & broad takeaways
1. The upward revision is credible but cautious:
Moving from 6.5 % to 6.7 % is a moderate upward adjustment — not overly aggressive, but it signals that EY believes there is room for upside given favorable policy tailwinds (i.e. GST reform). It reflects confidence, but with recognition of potential headwinds.
2. GST 2.0 is a significant lever, but not a panacea:
Its success depends heavily on implementation and how well demand-side stimulus translates into real economic activity. The gains will likely be uneven across sectors.
3. Domestic demand is now more central:
Previously some forecasts leaned heavily on exports as a tailwind; this revision emphasizes that growth is increasingly dependent on internal consumption, government spending, and structural reform.
4. External risks loom large:
Even with optimistic domestic policies, external headwinds (trade wars, protectionism, global slowdown) remain real risks. India needs to insulate itself and diversify.
5. Watch for second-half consistency:
The Q1 surge helps, but sustaining that momentum (or close enough) will test whether the optimism is justified. If Q2–Q4 stay strong, EY’s estimate may prove conservative.
Team: Creditmoneyfinance.com
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