Impact of GST Rate Reductions on Economy: UPSC Current Affairs Story Arc

Overview

This arc tracks a successful policy intervention where GST rate cuts, implemented in the latter half of 2025, served as a dual catalyst for the Indian economy. Initially, stable inflation of 2.1% in August 2025 provided the RBI and Government the cushion to implement tax reductions. These cuts triggered a record-breaking festive season with sales hitting ₹6.05 lakh crore, a 25% year-on-year increase. The final result was a dramatic cooling of the Consumer Price Index (CPI) to 0.25% and Wholesale Price Index (WPI) to -1.21% by October 2025. This narrative demonstrates how fiscal policy (tax cuts) can directly influence monetary outcomes (inflation targeting) and consumer behavior in a high-demand economy.

How This Story Evolved

GST cuts stabilized outlook (Item 6) → Boosted festive sales to record highs (Item 3) → Drove retail inflation down to 0.25% (Item 7)

1. 2025-09-15: Inflation and Economic Stability
   More details

   UPSC Angle: Inflation within RBI comfort zone; impacts monetary policy decisions.

   Key Facts:

   • Inflation rate (August 2025): 2.1%
   • Vegetable prices fell by 15.9%
   • Pulse prices fell by 14.5%
   • RBI comfort zone: 2% to 6%
2. 2025-10-22: India's Retail Sector Achieves Record Festive Sales
   More details

   UPSC Angle: India's retail sector achieves record festive sales.

   Key Facts:

   • Festive season sales reached ₹5.4 lakh crore in goods and ₹65,000 crore in services
   • 25% increase from last year
   • 72% of traders saw higher sales
   • Boosted by GST rate reductions on key categories
3. 2025-11-14: WPI inflation falls to (-)1.21% in October on GST cut, favourable base
   More details

   UPSC Angle: WPI inflation falls to (-)1.21% in October.

   Key Facts:

   • India's retail inflation (CPI) dropped to 0.25% in October 2025
   • Primarily due to GST rate reductions
   • Lowest inflation rate since the CPI series began in 2015
   • WPI inflation (October 2025): -1.21%
   • WPI inflation (September 2025): 0.13%
   • WPI inflation (October previous year): 2.75%

Genesis

Trigger

The announcement of GST rate reductions on key categories prior to the 2025 festive season, supported by the falling prices of vegetables (-15.9%) and pulses (-14.5%) as of September 15, 2025.

Why Now

The decision was enabled by inflation remaining within the RBI's 2-6% comfort zone (at 2.1% in August), allowing the government to prioritize consumption-led growth without fear of overheating.

Historical Context

Since the CPI series began in 2015, India has rarely seen inflation dip below 1%, making the 0.25% figure in October 2025 a historic outlier compared to the typical 4-6% range.

Key Turning Points

1. [2025-09-15] Confirmation of 2.1% August inflation

   Proved that food inflation (vegetables/pulses) was under control, giving the green light for GST cuts.

   Before: Fear of supply shocks. After: Confidence in economic momentum and managed outlook.

2. [2025-10-22] Record Festive Sales of ₹6.05 lakh crore

   Validated the 'GST-reduction-to-demand' causal chain.

   Before: 2024 festive sales. After: 25% year-on-year increase in retail activity.

3. [2025-11-14] CPI hits 0.25% and WPI hits -1.21%

   The lowest inflation in the modern CPI era (since 2015).

   Before: Inflation concerns. After: Concerns about deflation and real interest rates.

Key Actors and Institutions

Key Institutions

• GST Council
• Confederation of All India Traders (CAIT)
• Reserve Bank of India (RBI)
• Office of the Economic Adviser (for WPI)

Key Concepts

Consumer Price Index (CPI)

A measure that examines the weighted average of prices of a basket of consumer goods and services, used by the RBI as the primary inflation anchor.

Current Fact: CPI dropped to a historic low of 0.25% in October 2025.

Wholesale Price Index (WPI)

Measures the change in the price of goods sold and traded in bulk by wholesale businesses to other businesses.

Current Fact: WPI inflation fell to (-)1.21% in October 2025.

Base Effect

The impact of the previous year's price levels on the current year's inflation calculation.

Current Fact: A 'favourable base' from October 2024 (where WPI was 2.75%) contributed to the negative 1.21% reading in 2025.

What Happens Next

Current Status

As of November 14, 2025, India has entered a period of near-zero retail inflation (0.25%) and wholesale deflation (-1.21%).

Likely Next

Expectations of a significant RBI Repo Rate cut in the next Monetary Policy Committee (MPC) meeting to prevent potential deflationary pressures, alongside a review of the 'base effect' for 2026.

Wildcards

Global oil supply shocks or sudden shifts in the National Food Security Act implementation could disrupt the current low-price stability.

Why UPSC Cares

Syllabus Topics

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
• Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

Essay Angles

• Taxation as a tool for social welfare vs economic stimulus
• The paradox of low inflation: Benefit for the poor vs challenge for the producer

Prelims Likely: Yes

Mains Likely: Yes

Trend Signal: rising

Exam Intelligence

Previous Year Question Connections

• Weightage of food in CPI vs WPI and RBI's use of CPI. — This arc tests the real-world application of CPI (0.25%) as the primary gauge for RBI policy.
• Definition of the 'Base Effect'. — The Oct 2025 WPI drop is explicitly attributed to a 'favourable base' in the news item, a core UPSC concept.

Prelims Angles

• The lowest CPI recorded since the 2015 series began (0.25%)
• Negative WPI (-1.21%) and the impact of 'base effect' on its calculation
• Weightage of vegetables and pulses in the fall of inflation during late 2025
• Total value of goods vs services in the 2025 festive season (₹5.4L cr vs ₹65k cr)

Mains Preparation

Sample Question: Analyze the causal relationship between fiscal measures like GST rate reductions and their impact on retail inflation and consumer demand. In light of the 2025 economic data, discuss if tax-led disinflation is a sustainable strategy for India.

Answer Structure: Intro: Define the 2025 scenario (low CPI, high sales) → Body 1: Mechanisms of GST cuts on disposable income and demand → Body 2: How tax cuts lowered WPI/CPI through manufacturing and fuel cost reduction → Critical Analysis: Risks of deflation and the 'base effect' illusion → Conclusion: Need for a balanced fiscal-monetary mix.

Essay Topic: The Great Indian Consumer: How Policy Reforms Shape National Aspirations

Textbook Connections

Key Takeaway

The late 2025 economic arc proves that strategic GST cuts can break the trade-off between growth and inflation, fueling record consumer demand while driving price indices to historic lows.

All Events in This Story (3 items)

1. 2025-09-15 [Economy] — Inflation and Economic Stability
   The inflation rate in August 2025 was 2.1%, remaining within the Reserve Bank of India (RBI) comfort zone of 2% to 6%. Food inflation was low, with vegetable prices falling by 15.9% and pulse prices by 14.5%, supported by the National Food Security Act. With GST rate cuts and limited oil supply effects, inflation is expected to remain manageable, supporting economic momentum.
   More details

   UPSC Angle: Inflation within RBI comfort zone; impacts monetary policy decisions.

   Key Facts:

   • Inflation rate (August 2025): 2.1%
   • Vegetable prices fell by 15.9%
   • Pulse prices fell by 14.5%
   • RBI comfort zone: 2% to 6%
2. 2025-10-22 [Economy] — India's Retail Sector Achieves Record Festive Sales
   India's retail sector achieved record festive season sales of ₹5.4 lakh crore in goods and ₹65,000 crore in services between Navratri and Diwali, marking a 25% increase from last year. A CAIT survey found that 72% of traders saw higher sales, largely due to GST rate reductions on key categories.
   More details

   UPSC Angle: India's retail sector achieves record festive sales.

   Key Facts:

   • Festive season sales reached ₹5.4 lakh crore in goods and ₹65,000 crore in services
   • 25% increase from last year
   • 72% of traders saw higher sales
   • Boosted by GST rate reductions on key categories
3. 2025-11-14 [Economy] — WPI inflation falls to (-)1.21% in October on GST cut, favourable base
   Wholesale price inflation (WPI) in India fell to -1.21% in October, driven by lower prices of food articles, fuel, and manufactured items, according to government data released on November 14, 2025. In comparison, WPI-based inflation was 0.13% in September and 2.75% in October of the previous year.
   More details

   UPSC Angle: WPI inflation falls to (-)1.21% in October.

   Key Facts:

   • India's retail inflation (CPI) dropped to 0.25% in October 2025
   • Primarily due to GST rate reductions
   • Lowest inflation rate since the CPI series began in 2015
   • WPI inflation (October 2025): -1.21%
   • WPI inflation (September 2025): 0.13%
   • WPI inflation (October previous year): 2.75%