O-GST 

■ In response to the proposed tariff hikes by US, the Indian government is rolling out GST rate cuts to boost domestic consumption, hoping to cushion the economic shock.

■ It is consolidating four tax slabs (5%, 12%, 18%, and 28%) into two (5% and 18%). It is expected that 99% of goods currently taxed at 12% will move to 5%, and 90% of those at 28% will shift to 18%, impacting categories like two-wheelers, small cars, commercial vehicles, cement and FMCG goods.

As a new 50% tariff regime from the United States takes effect, India’s labor-intensive export sectors—textiles, gems and jewelry, shrimp, carpets, and furniture—are bracing for a significant hit. These industries, vital for job creation and export growth, face rising costs that could strain India’s external trade balance. In response, the Indian government is rolling out GST rate cuts to boost domestic consumption ahead of the festive season, hoping to cushion the economic shock.

But will this policy be enough to counter the tariff impact, or is India staring down a double-edged challenge of shrinking exports and global economic uncertainty? These tariffs target India’s key export sectors, threatening the competitiveness of industries that drive employment and economic growth. To counter the export slowdown, the Indian government is implementing significant GST reforms, consolidating four tax slabs (5%, 12%, 18%, and 28%) into two (5% and 18%). It is expected that 99% of goods currently taxed at 12% will move to 5%, and 90% of those at 28% will shift to 18%, impacting categories like two-wheelers, small cars, commercial vehicles, cement, air conditioners, and FMCG goods.

A senior UK based trade analyst described the tariffs as “punitive,” warning of potential unemployment in affected sectors and broader disruptions in global trade dynamics. “The longer these tariffs persist, the worse the effects,” he said, emphasizing the need for dialogue to reduce the rate to a more manageable level, ideally aligning with the 10-15% tariffs imposed on other nations like the UK and EU. He advised investors to monitor US inflation, jobless numbers, and the US dollar for signs of tariff fallout, noting that rising costs could ultimately burden American consumers. However, he cautioned that while GST cuts could provide temporary relief, they are not a long-term solution noting that prolonged stimulus could have fiscal consequences, drawing parallels to post-COVID recovery challenges in the UK.

A senior member at the Center for Strategic and International Studies underscored the severity of the impact, noting that nearly half to two-thirds of India’s $80 billion in exports to the US could be affected. He pointed out that products like textiles, garments, leather goods, smartphones and pharmaceuticals don’t have margins to absorb a 50% tariff. He highlighted the gems and jewellery sector, already weakened by lab-grown diamonds, as particularly vulnerable. He also stressed that India must negotiate aggressively, leveraging its strategic partnership with the US, including its role in international forums and its appeal as an alternative to Chinese supply chains. A senior office bearer in various chambers of commerce and industry expressed confidence in Indian industry’s adaptability, noting that exporters have been preparing for this tariff threat for six months.

He said that companies are exploring alternative markets and expanding domestically to mitigate the impact. However, he expressed apprehension that smaller enterprises heavily reliant on the US market may struggle, with some at risk of closure. He praised government initiatives like free trade agreements (FTAs) with Oman, the UAE, and others, which aim to diversify export destinations and reduce dependence on any single economy. He called the GST rationalization a “game changer,” arguing that it puts more money in consumers’ hands and encourages industry investment.

Also emphasized the need for a multi-pronged strategy. Many experts advocated for stepped-up negotiations with the US, highlighting India’s low average tariff rate of 4.6% and its strategic importance as a trade partner and FDI destination. They expressed optimism that the US would eventually see the “lack of logic” in imposing 50% tariffs on India, especially when countries like China face lower rates despite larger trade imbalances. As India navigates this tariff storm, the GST bonanza offers a lifeline to fuel domestic consumption, but experts warn it’s not a silver bullet. Coordinated action across government, industry, and diplomatic fronts will be crucial to mitigate the impact of shrinking exports and maintain economic resilience