Modi proposes GST cuts to cushion consumers from US tariff threat
MUMBAI: Indian Prime Minister Narendra Modi’s push to slash consumption taxes on everyday goods could deliver billions of dollars in annual relief and boost demand in an economy bracing for painful US tariffs, experts say.
US President Donald Trump has threatened to double import duties on India from 25% to 50% to punish New Delhi for buying oil from Russia, saying the purchases help Moscow fund its invasion of Ukraine.
The prospective measure has clouded the outlook for the world’s fifth-largest economy, with Indian exporters warning of plunging orders and severe job losses.
New Delhi has called Washington’s move “unfair, unjustified and unreasonable” but is already seeking to cushion the blow. Last week, Modi promised to “bring down the tax burden on the common man” during an annual speech to mark India’s Independence Day.
Under his proposals, cuts to the goods and services tax (GST) would make everything from small cars to air conditioners cheaper for consumers. Currently, the GST operates under a complex four-tier structure, with rates ranging from 5 to 28%.
Modi would collapse most goods into just two tiers, taxed at either 5% or 18%. He has called the change a “Diwali gift”, referring to the Hindu festival of lights when consumers splurge on everything from gold and clothes to consumer electronics.
Analysts say the reform could reduce tax collections by between $13 billion and $17 billion annually, helping to shore up domestic demand. Emkay Global Financial Services described it as a “welcome reform towards boosting domestic consumption”, estimating that most items currently subject to the top 28% rate would move to 18% while nearly all in the 12% tier would fall to 5%.
Motilal Oswal, an Indian financial services firm, said the changes would bring benefits to a wide range of sectors and “sizeable savings” to households.
The fate of the proposal rests with the GST Council, which includes state government representatives and has struggled to achieve broad consensus in the past. If approved, the cuts would strain public finances, but experts say they could help offset tariff risks and burnish Modi’s credentials among the middle class.
The announcement comes ahead of expected elections later this year in Bihar, a Hindu-majority state of 130 million people and a key political battleground for Modi.
“The popular economic narrative right now is that of Trump’s 50% tariffs and how the US-India relationship is seeing setbacks,” said Deepanshu Mohan, economist at O P Jindal Global University. “The GST readjustment is a strong response from Modi in that context. It’s Modi telling the middle class: ‘We are trying to make sure you have enough at your end.’”
Mohan added that the move also acknowledges that India’s economy has failed to work for its “low middle-income class for some time”.
Although economists have long called for an overhaul of the GST system, Modi’s surprise announcement comes as US-India ties hit a multi-decade low. Economists estimate that without a trade deal, Trump’s tariffs could drag India’s GDP growth below 6% this fiscal year, below the Reserve Bank of India’s projection of 6.5%.
New Delhi’s stance on Russian oil imports is expected to become clearer by late September, since most cargoes this month were contracted before Trump’s threats, according to trade intelligence firm Kpler. Kpler analyst Sumit Ritolia told AFP that Indian refiners are showing “growing interest” in US, West African and Latin American crude, but that this reflects “greater flexibility, not a deliberate pivot”.
“Until there’s a clear policy shift or sustained change in trade economics, Russian flows remain a core part of India’s crude basket,” he said.
As the clock ticks down on the tariff deadline, the state of US-India trade negotiations remains uncertain. New Delhi says it is committed to striking a deal, but Indian media reports suggest US negotiators have postponed a planned late-August visit to the Indian capital.
By RSS/AFP
