Will GST rate cuts help counter Trump’s 50% tariffs? India’s GDP growth may even go up; here’s why

Donald Trump administration’s 50% tariffs on India have rendered the nation’s exports uncompetitive within the US markets. (AI picture)

India, the world’s quickest rising main financial system, is making ready to bear the brunt of US President Donald Trump’s commerce conflict and 50% tariffs. In this backdrop, the Goods and Services Tax (GST) rate cuts couldn’t have come at a extra opportune time.While FM Nirmala Sitharaman has clarified that the GST rate cuts had been within the works for a number of months, and the announcement is unrelated to US tariffs, a home consumption enhance for an financial system observing uncertainty for its exports sector is a welcome transfer, really feel specialists.The Modi authorities has introduced better-than-expected GST reforms and rate construction rationalisation, with a majority of things consumed by the frequent man and center class set to see value cuts from September 22, the beginning of the Navratras. The transfer to place extra disposable earnings within the fingers of thousands and thousands of shoppers at first of the festive season is broadly anticipated to supply a consumption-led booster shot to India’s GDP growth.But will the GST rate cuts be sufficient to counter the impression of Trump’s 50% tariffs on India? We weigh in

GST rate cuts: Impact on GDP growth

Donald Trump administration’s 50% tariffs on India have rendered the nation’s exports uncompetitive within the US markets – and America is India’s largest buying and selling associate. Most specialists count on the tariffs to hit over 50% of India’s exports to the US, a blow that will run in a number of billion {dollars}.But, India is essentially a home consumption pushed financial system. The share of exports in its GDP growth will not be giant and specialists consider the impression of Trump’s tariffs will vary wherever between 30 to 90 foundation factors. Besides, the federal government can also be engaged on offering aid to exporters, and commerce agreements with different international locations will help Indian companies discover markets outdoors the US for his or her items.According to Madan Sabnavis, Chief Economist, Bank of Baroda, “GST reforms will help lowering cost of production for companies which will be useful for them when competing globally. It can hence to a limited extent compensate for the higher cost imposed by the tariffs. It is not a cure for sure but a support.”Also Read | GST rate cuts bonanza! What is cheaper and dearer? Check full listing of things in 0%, 5%, 18% & 40% slabs“GST is more to spur demand domestically and correct for inverted duty structure where it is existent,” he tells TOI.Sachchidanand Shukla – Group Chief Economist at Larsen & Toubro shares that a number of research peg the growth multiplier at 1.08, however relying on the elasticity of varied segments & various propensity of corporations to move on the advantages the online impression on GDP may lie wherever between 500-900 bn.

New GST charges

“However, that is still a short term view. The real benefit will compound over the medium to longer term by showcasing the Laffer Curve in effect with low rates/ prices leading to higher consumption, compliance and economic activity. So in the short term, it will be able to mitigate some of the adverse impact of US tariffs, possibly up to 0.4%, but the real macro impacts will be in the longer term via lower inflation, higher activity etc,” he tells TOI.Experts additionally say {that a} home consumption enhance may be an efficient counter to the continued world commerce conflict. Radhika Rao, Senior Economist & Executive Director at DBS Bank, Singapore says, “The domestic anchor is likely to surface as an important offset for a challenging external environment this year. In this respect, policy support through direct and indirect tax relief, besides boost from a good monsoon and pay commission changes are expected to impart positive demand impulses into the economy.”“This is in addition to easing inflation, which has provided relief to real purchasing power. There is also a need for direct measures to support affected businesses due to the tariff announcements, especially smaller and labour-intensive firms,” Rao tells TOI.DK Srivastava, Chief Policy Advisor, EY India explains “As far as GST is concerned, major sectors benefiting from rate reduction and rationalization include textiles, consumer electronics, automobiles, and most food items. These are employment intensive sectors where the benefits of lower prices would be quite broad based.”Also Read | GST rate cuts from September 22! All that you must find out about new tax charges for objects – 75 FAQs answered“On the production side, sectors that would benefit include fertilizers, agricultural machineries and renewable energy. In these sectors farmers would benefit through lower input costs. Thus, there is a demand and efficiency improving impact which would offset some of the revenue loss. These positive effects would gather momentum over the medium term and the base broadening effects could eventually overtake the short-term revenue reduction effects,” he tells TOI.“On the whole, even with some slippage in the fiscal deficit to GDP ratio, we expect the real GDP growth to actually increase from existing estimates of 6.5% to 6.7% in 2025-26. This is likely to happen in spite of the US tariff hikes. Most of the tariff affected sectors such as textiles would recover relevant ground with the increase in domestic demand and export diversification to countries where new free trade agreements would become effective later in the year,” he provides.

GST rate cuts: What about hit on income collections?

Revenue secretary Arvind Shrivastava estimates that on the 2023-24 consumption base, there can be an estimated impression of Rs 48,000 crore on tax collections. Shrivastava is assured that GST rate cuts would have the specified impression of producing buoyancy and spurring demand.Indeed an SBI Research evaluation says that earlier rounds of GST rate adjustments, corresponding to these in July 2018 and October 2019, recommend that rationalization doesn’t essentially weaken income collections. “Instead, the evidence points to a temporary adjustment phase followed by stronger inflows. While an immediate reduction in rates can cause a short-term dip of around 3–4% month-on-month (roughly ₹5,000 crore, or an annualized ₹60,000 crore), revenues typically rebound with sustained growth of 5–6% per month,” SBI says in its report.

GST rate rationalisation traits

“In past episodes, this dynamic has translated into additional revenues of nearly ₹1 trillion. Importantly, rationalisation should be seen less as a short-lived stimulus to demand and more as a structural measure that simplifies the tax system, reduces compliance burdens, and enhances voluntary compliance, thereby widening the tax base,” it provides.

Not simply GST rate cuts – Other booster pictures for financial system

At the beginning of the 12 months, FM Sitharaman introduced large earnings tax cuts within the new tax regime – the ensuing tax financial savings for the center class is anticipated to ultimately feed into financial growth.Add to that the 1% repo rate reduce by RBI, which has lowered EMIs of mortgage debtors – one more consumption enhance for the financial system.Additionally, the eighth Pay Commission is anticipated to be rolled out within the coming months, placing more cash within the fingers of lakhs of presidency staff.Also Read | GST rate cuts & rationalisation: Top winners & losers of latest tax slabs – examine listingRetail inflation can also be at a several-year low, a optimistic issue forward of the festive season.The GST rate cuts are an icing on the cake for the above 4 components. DK Srivastava of EY India says, “At the time when the Union Budget for 2025-26 was presented, the Finance Minister’s speech specified an estimate of foregone revenues of Rs 1 lakh crore for direct taxes mainly on account of personal income tax rate rationalization and reduction and Rs 2,600 crore for indirect taxes most of which related to concessions in custom duty rates. The proposed GST rate rationalization and reduction is expected to result in net revenue reduction of Rs 48,000 crore, which would be shared between the central government and the states.”“Correspondingly, the disposable incomes in the economy would go up by a similar magnitude resulting in augmentation of overall demand. In addition, there would be price effects for sectors where rate reductions lead to lower prices,” he concludes.