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India’s Reform Agenda: GST and beyond

Moving toward a more resilient India

We hosted Mr. Rajiv Memani, Chairman and CEO of EY India and President of CII 2025-26, as a part of CEO Track at AGIC CY25. Here are our key insights from the session:

A serious intent to bring in another wave of reforms

The level of engagement and discussions on reforms have been on a high keel– the first time in this term of government. Deeper engagement by the Prime Minister suggests serious intent to reform. Key pillars that the government is focusing on include: (i) GST 2.0, (ii) ease of doing business, (iii) sectoral unlocks, and (iv) improving competitiveness.

A 2.0 refresh proposed for GST

GST 1.0 was by far the biggest tax-related reform in the past decade, but some fatigue had begun to creep in; hence, there was an urgent need to look at it through a fresh lens and weed out systemic blockages. The goal of lowering the tax slabs for several products and services is to stimulate downstream consumption, lower the incidence of inverted duty structure, simplify slabs, address classification issues and ease procedures. Strategically, this should be seen as a long-term signal for business- and investment-friendly decisions.

All eyes on meeting of Council of State Ministers

The proposals are currently at the level of Council of State Ministers, which is likely to meet over the next few days. Once proposals are approved by the council, the implementation of new measures could be swift, especially as the festive season is around the corner. While there have been some concerns over few states not being on board, Mr. Memani indicated that states could actually be better off in GST 2.0, as they will likely end up getting 50% of compensation cess, which will likely offset any hit from lower GST rates.

Input tax credit issue may stay in few cases

While one of the key objectives of GST 2.0 is to resolve the issue of blocked input tax credit (ITC), in some cases this may sustain, especially where the final goods/services are proposed to be exempt from GST. In such cases, while the amount of ITC may come down (owing to lower taxes), it may not be feasible for the exchequer to provide ITC benefits. Consequently, in such cases the overall pass-through to the end consumer prices could be lower than the total reduction in the GST rate. However, since multiple industry representations have been made, the final outcome is awaited.

Impact on fiscal account expected to be manageable

As per Mr. Memani, the impact of foregone GST revenue on the fiscal should be manageable. The government has displayed remarkable fiscal rectitude over the years and has generally worked with conservative estimates, so it is unlikely that it will deviate materially from this path. The multiplier effect of higher disposable income can also compensate somewhat, as volumes may pick up owing to lower retail prices. Moreover, in an extreme situation, the government has multiple avenues to mobilize receipts, with the standout being the disinvestment route, which the government has utilized moderately over the past few years. At some stage the government will have to consider disinvestments more intently now.

Ease of doing business — the silent reforms

Improving the ease of doing business can go a long way to extract the value for the private sector. Some key measures that could help businesses include: (i) faster environmental approvals, (ii) single-window clearances and faster construction permits, (iii) judicial reforms and decriminalization of smaller infractions, and (iv) tax simplification. The ease-of-doing-business efforts are driven directly by the cabinet secretary. The team is engaging in high-level benchmarking exercise with other nations and cross-benchmarking between states to identify best practices.

The next leg of reforms: Factor reforms and sectoral unlocks

Mr. Memani iterated that there will be a cavalry of reforms, and after GST, one can expect to see long overdue factor market reforms, especially in land and labor. Unlike the 1991 reforms, the current set of reforms will likely come in discrete waves wherein the government is likely to announce reforms concerning a particular sector or factor with a gap. The approach is to scrutinize key sectors minutely and then announce a comprehensive dossier of reform measures. Some of the key sectoral unlocks could be in mining, tourism, energy, manufacturing, etc.

Aiming to energize the private sector

One of the key objectives of the proposed GST 2.0 reforms is to infuse energy into the private sector through higher final consumer demand. This should lead to better capacity utilization, and can ultimately be a key driver for reviving private capex. Moreover, any dip in indirect taxes could be moderated by higher direct taxes induced by higher demand. Also, the government is gradually directing market focus toward debt/GDP rather than just fiscal deficit, so as to mitigate any over-reaction to short-term aberrations in the fiscal consolidation trajectory.

India Inc. scorecard on R&D, capex and wage growth needs to improve

Mr. Memani highlighted that Indian policymakers have three key expectations from the private sector to gradually take India on the path of resilience and greater selfreliance: (i) reversal of severe underinvestment in R&D; (ii) better wage growth; & (iii) capex and capacity building India probably has among the lowest average R&D-to-revenue ratios among key countries globally, and private companies have been very conservative and calibrated on capital investments. While this approach may have served to generate higher RoE historically, current times call for a greater focus on R&D to ensure more value addition. He also indicated that India needs to wean away from the low-cost model and reorient its economy to drive more trickle-down benefits. Unless the bottom 30% of India is strengthened, the consumption flywheel is unlikely to start.

A playbook for higher capex intensity

Mr. Memani indicated that the government is focusing on comprehensive factor reforms and improved ease-of-doing business to enhance India’s competitiveness and shift it toward higher value addition. Many of these could be achieved through easier and streamlined processes. The number of clearances needs to be pruned; for e.g., many industries currently face onerous clearance requirements (Mining-43, Hospital-65, Hotels-46). These can be cut down and the overall clearance timeline should also be crunched to within 1 year.

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