Robust GST collections, easing inflation, and rate rationalization reflect resilience, though banks face short-term profitability challenges
Our Bureau
Mumbai / New Delhi
India’s economy is showing renewed momentum as September’s Goods and Services Tax (GST) collections surged 9.1 per cent year-on-year, inflation outlook eased to multi-year lows, and tax reforms began to take hold. Yet, a mixed earnings outlook for banks points to underlying challenges, highlighting the uneven path of the country’s recovery.
According to official data, GST revenues rose to ₹1.89 lakh crore in September 2025 from ₹1.73 lakh crore a year earlier, marking the second straight month of strong double-digit growth. In August, collections had already touched ₹1.86 lakh crore, underscoring resilient consumption patterns and improved tax compliance.
The performance marks a new milestone for the indirect tax system, which clocked a record gross collection of ₹22.08 lakh crore in FY25, up 9.4 per cent from the previous year.
A Reform with Teeth
Driving the revenue momentum is the government’s GST 2.0 reform package, rolled out late last month. By lowering tax slabs on essentials and rationalizing the structure, the reform aims to strengthen rural demand, ease compliance burdens, and support small businesses.
Everyday items like packaged foods, personal care products, and dairy-based staples have been moved to lower tax brackets, with some essentials now attracting zero tax. Analysts expect companies to cut retail prices by 4–6 per cent, a move likely to boost rural consumption just ahead of the festive season.
At the same time, luxury goods and so-called “sin items” have been shifted to a 40 per cent bracket, protecting revenues while ensuring that relief is targeted at mass-market consumption.
“The GST rationalization is a structural shift,” said a senior tax analyst with a leading consultancy. “It reduces distortions like inverted duty structures, improves affordability, and enhances compliance, which together can accelerate GDP growth in the medium term.”
An Uneven Ride
While GST numbers indicate robust consumption trends, the banking sector is grappling with short-term headwinds. A research note from Motilal Oswal Institutional Equities projects muted earnings for Q2 FY26 across private and public lenders, citing pressure on net interest margins (NIMs), moderate credit growth, and rising costs.
Systemic credit growth stood at 10.3 per cent year-on-year in September, reflecting subdued demand from both retail and corporate segments. Private banks are expected to post a 7.3 per cent decline in net profit for the quarter, while public sector banks may see earnings slip by 7.1 per cent.
The report attributes this to lagged impacts of policy rate cuts, which have squeezed margins, alongside weak treasury gains due to range-bound bond yields. “Unsecured retail stress is still evident,” the report noted, though it added that credit costs are expected to normalize in the second half of FY26.
Overall, banking sector net profit is estimated to fall 7.2 per cent in Q2, but analysts project a sharp rebound thereafter, forecasting a strong 17.7 per cent earnings CAGR for the sector between FY26 and FY28.
“Large, diversified private banks and stronger PSUs are better placed to weather the pressure,” said a senior banking analyst. “We expect earnings recovery to kick in from the second half of this year as borrowing costs ease and credit demand revives.”
Inflation Picture Brightens
If banks are weighed down by near-term pressures, the inflation outlook offers a rare silver lining. A report from the State Bank of India (SBI) argues that consumer price inflation could undershoot even the Reserve Bank of India’s revised projections, thanks to favorable domestic factors.
Healthy monsoon progress, higher kharif sowing, adequate reservoir levels, and strong foodgrain stocks are all expected to keep prices in check. The recent GST rate cuts are also expected to reduce retail inflation, particularly in rural areas.
The RBI in September cut its FY26 CPI inflation forecast by 50 basis points to 2.6 per cent—already 160 bps lower than its April estimate. SBI economists suggest actual inflation could come in even lower, potentially giving the central bank room for further rate cuts.
Alongside the easing price pressures, the RBI revised its GDP growth projection for FY26 upward to 6.8 per cent, citing strong domestic fundamentals and resilient consumption. For FY27, it expects inflation to stabilize at 4.5 per cent.
The combination of strong tax collections, falling inflation, and structural reforms paints a broadly positive picture of the Indian economy. The government’s focus on rationalization and compliance-driven revenue growth is expected to provide fiscal headroom for infrastructure and social sector spending.
At the same time, the banking sector’s earnings slump underlines that the recovery is far from even. Margins remain under pressure, credit growth is tepid, and stress pockets—particularly in unsecured retail and microfinance segments—are still visible.
Yet analysts agree the fundamentals are turning in India’s favor. “The GST reforms and low inflation trajectory are game changers,” said an economist at a global bank. “Even with global uncertainties, India’s domestic drivers—consumption, rural demand, and tax buoyancy—are strong enough to support growth.”
