Centre-state budget talks, GST Council meet after Parliament session; jobs, growth, urban consumption in focus

Finance minister Nirmala Sitharaman is set to consult state finance ministers on the FY26 Union Budget following Parliament’s winter session, which concludes on 20 December. Her focus: strategies to drive job creation and economic growth amid signs of easing urban consumption.

In addition, Sitharaman will chair a Goods and Services Tax (GST) Council meeting when state finance ministers gather for a two-day session in Rajasthan after 20 December, likely over a weekend, a person informed about the development said.

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While budget consultations have only recently begun, employment generation is expected to be a central theme in the FY26 discussions, said a second person with knowledge of the planning. The budget consultation and GST Council meeting are expected to be held on separate days.

Urban consumption and GST Council's role

These meetings come as the government ramps up efforts to enhance employability among underprivileged youth, notably through the PM internship scheme. Meanwhile, data in the finance ministry’s latest monthly report highlighted signs of softening urban consumption, sparking concerns over consumer demand.

Economists argue that the GST Council may hold a key role in reviving demand.

“More than the Union Budget, it is the GST Council which now holds the key to boosting consumption. The Council has to look at ways to reduce GST rates to improve consumption demand. That is a major policy instrument available now, provided states also agree,” said N. R Bhanumurthy, director, Madras School of Economics, noting that while GST revenue hit ₹1.87 trillion in October—the second highest in the new indirect tax regime, the tax’s impact on consumption has been apparent.

“We have data to show that GST is actually hampering growth. Higher the taxes, lower the GDP growth,” Bhanumurthy said. “GST rate reduction is a reversable and easy to deploy instrument to boost consumption demand. If high GST rates now slow down economic growth rate, subsequently, lower economic growth will lead to lower GST collection." 

Taxes have a negative multiplier effect on the economy: higher taxes curb disposable income, whereas lower taxes mean more money in the hands of people for spending.

A ministerial panel, led by Bihar's deputy chief minister Samrat Chaudhary, is examining GST rate rationalization. “However, any rate change could take longer as states are not inclined to losing tax revenue,” said the first person cited above. Nonetheless, proposals to cut GST on life and health insurance premiums may be tabled at the Council's upcoming session, added the person.

Indicators of urban demand, such as FMCG and auto sales, have weakened in FY25, contrasting with more resilient rural demand, according to finance ministry’s monthly review of the economy. 

At pre-budget meetings, states traditionally raise their needs for fiscal support and specific projects. For FY25, the Centre has earmarked ₹1.5 trillion as special assistance to states for capital expenditure and a record ₹11 trillion in Centre’s capital expenditure (capex).

The Centre’s capex, projected at 3.4% of GDP this year, could be moderated to align with the Fiscal Responsibility and Budget Management (FRBM) Act commitments, suggested Bhanumurthy. 

“Now it looks like the absorption capacity of central government capex is getting limited although at the state level, absorption capacity is there. The central capex could be contained to 3% so that liquidity is available for private investment and also for states’ capex,” said Bhanumurthy.

Budget wish list

Experts anticipate a pro-jobs budget.

“Job creation and skill development initiatives will likely remain a focus in budget for FY26, addressing the needs of India’s youthful workforce,” said Rajat Mohan, senior partner at AMRG & Associates, a chartered accountancy firm.

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“Simplification of the tax regime, potentially with extended concessions for manufacturing, could also be on the agenda to encourage investment,” said Mohan.

A reintroduction of the 15% corporate tax rate for new manufacturing facilities is a key industry demand, noted Amit Singhania, managing partner at Areete Law Offices. “India is a sweet spot in this global turmoil and if 15% corporate tax rate is re-introduced, it will provide an additional boost in the form of renewed confidence for entrepreneur community and better rate of return for investors," said Singhania.

The 15% rate, previously available to new facilities, expired in March.

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Additionally, income tax relief for middle-income earners, including revised tax slabs and increased standard deductions, is expected to ease inflationary pressures. Mohan anticipates customs duties could be adjusted to support local industries, with protective tariffs for imports and reduced duties on essential raw materials.