It has a big multiplier benefit for MSMEs that the Modi government is betting on

The newly announced GST 2.0 seeks a reset: it collapses the system into two main rates (5% and 18%), with a 40% rate for luxury and sin goods, while reducing rates on essentials and correcting distortions.

The net impact— ₹93,000 crore of revenue forgone from rate cuts, partly offset by ₹45,000 crore from raising the top rate—amounts to a loss of about ₹48,000 crore (on the 2023-24 consumption base).

Critics warn of fiscal slippage, but the economic opportunity lies in harnessing the tax multiplier effect while simultaneously managing the multiplier effects of government expenditure to boost MSMEs, which constitute a major growth engine of the Indian economy.

For MSMEs, the tax multiplier is not a political slogan or even an abstract Keynesian idea, but a lived reality. When households have more money to spend—say, 70 paise out of every rupee saved from lower taxes—the impact is felt first in neighbourhood kirana stores, workshops and service units.

A shopkeeper who sells more soap, for example, may hire an extra hand, who then spends her wages locally.

With each round of extra spending, some money leaks into savings or imports, but much of it keeps circulating, fuelling higher sales for small businesses and creating a ripple effect on jobs and investment. This chain reaction is what is called the multiplier.

Not all tax cuts, however, benefit MSMEs equally. Income tax relief mostly helps the salaried class, which tends to save more and spend less in comparison, with only limited trickle-down gains for the country’s small enterprises.

GST cuts by contrast apply directly at the point of purchase and benefit virtually every household. By raising disposable income, especially for middle- and low-income groups, they boost everyday consumption—the very demand that sustains MSMEs.

This makes GST relief more progressive, consumption-oriented and far more powerful in multiplying opportunities for India’s small business sector.

Empirical evidence underscores why GST cuts matter more for MSMEs. Bose and Bhanumurthy (2013) estimated the GST multiplier at 1.08, higher than that of personal income tax (1.01) or corporate tax (1.02).

This implies that every rupee of GST relief generates a proportionately larger demand boost. Even with a conservative multiplier, the immediate consumption lift from GST savings expands household spending, translating into higher sales for MSMEs.

When combined with this fiscal year’s income tax reductions, the overall stimulus is amplified. Crucially, GST 2.0 precedes the festive season, when households are most likely to spend on discretionary purchases and categories where MSMEs dominate supply chains.

For MSMEs, GST 2.0 is not just about boosting demand, but also about easing supply-side constraints. Inverted duty structures—where inputs are taxed more heavily than final products—have long tied up the liquidity of small firms.

A textile unit paying higher tax on yarn than on finished fabric or an electronics assembler taxed more on components than on the device often ended up with working capital locked in accumulated input tax credit sums taking too long to flow back.

By aligning input and output rates across a swathe of industries, GST 2.0 unlocks this liquidity, allowing MSMEs to reinvest in operations and growth. Simplified tax compliance will further cut their time and cost of tax management, while a cleaner code should reduce litigation risks that disproportionately burden smaller firms.

Together, these reforms strengthen both the financial health and investment appetite of MSMEs, making GST 2.0 far more than a one-off tax concession—it is a structural enabler of competitiveness.

For MSMEs, the promise of a strong GST multiplier will materialize only if the government sustains its public investment. There is evidence that while tax multipliers are modest, the multiplier of capital expenditure by the government is as high as 2.45—implying that every ₹1 crore spent on infrastructure can generate ₹2.45 crore of output that will count as part of India’s GDP.

For small businesses, this is critical. Roads, logistical parks, power networks and digital infrastructure directly lower costs and expand markets. If GST-related revenue losses force states to cut back on such capital spending, the gains for MSMEs from higher consumption could be undermined.

The policy challenge, therefore, is to ensure that the GST 2.0 demand boost is reinforced by continued public investment, which should not be diluted.

Seen narrowly, GST 2.0 is about rates and slabs. Seen strategically, it is about re-anchoring India’s growth model in domestic consumption at a time of slowing global trade and rising protectionism.

In such an environment, MSMEs, which are deeply linked to local demand and employment, become the frontline beneficiaries of a simpler, progressive and demand-favouring system of indirect taxation.

The real test of GST 2.0 will not be what it does to next quarter’s revenue numbers, but whether it unleashes a virtuous cycle of spending, investment and business growth.

For too long, India’s tax debates have focused on revenue neutrality and fiscal arithmetic. The bigger question is whether tax policy can serve as an intelligent macroeconomic stimulus without turning fiscal balances unstable across the Centre and states.

If implemented well, GST 2.0 will be more than a tax reform; it will be a growth reform for MSMEs, freeing their working capital, boosting their sales and expanding their investment appetite. By putting more money in the hands of consumers, the government is also strengthening the most reliable partner of MSMEs: a confident domestic market that’s ready to spend more.

These are the author’s personal views.

The author is professor of economics and policy and executive director, Centre for Family Business & Entrepreneurship at Bhavan’s SPJIMR.