India introduced a major reform in its Goods and Services Tax (GST) system in 2025. The government simplified the tax structure by reducing the number of GST rates from four to two main slabs. The changes are intended to ease compliance, reduce economic distortions, and increase consumer spending. This reform comes amid economic challenges including slowing corporate earnings, rising non-performing assets in banks, and foreign investor outflows.
Recent Economic Context
India’s corporate sector faced shrinking earnings in early 2025. Core earnings declined by 3.3% year-on-year in the first quarter. Industrial output growth slowed to a 10-month low. Bank asset quality worsened with rising non-performing loans. Foreign investors reduced their exposure to Indian equities amid a depreciating rupee and sluggish profits. Geopolitical tensions with the US over India’s oil imports from Russia added pressure through impending tariffs on Indian exports.
GST Simplification and Its Goals
The GST rates were consolidated from four slabs (5%, 12%, 18%, 28%) into two main rates – 5% and 18%. A higher 40% rate remains on sin goods like tobacco. The reform aims to reduce compliance costs for businesses and encourage consumer spending by lowering tax burdens on essential goods and services. The government expects this to boost household consumption, which accounts for nearly 60% of India’s GDP.
Impact on Consumption and Economy
The State Bank of India estimates that the GST rationalisation could increase annual consumption by about ₹2 trillion. Higher consumer spending is expected to stimulate manufacturing and service sectors. This domestic demand boost is particularly important as exports face headwinds due to US tariffs. The reform is designed as a buffer against external shocks rather than a comprehensive growth strategy.
Comparison with Previous Tax Cuts
The 2025 GST reform echoes the corporate tax cuts of 2019, which aimed to revive growth by lowering tax rates for companies. That move initially boosted market sentiment but failed to trigger sustained investment or employment growth. Similarly, the current GST cut is a tactical response to economic and geopolitical challenges rather than part of a long-term economic vision.
Structural Challenges Beyond Taxation
India’s ability to gain global market share remains limited by structural issues. Examples include regulatory red tape, corruption, poor infrastructure, and inconsistent policies. These frictional costs hinder competitiveness despite tax incentives. The textile sector illustrates this, where India’s export share stagnated while competitors like Vietnam and Bangladesh expanded. Tax reforms alone cannot resolve these deeper problems.
Geopolitical and External Risks
The US has imposed tariffs on Indian exports due to India’s purchase of Russian oil. This threatens key export sectors and could worsen the trade balance. Further US actions might target software services, visa policies, and remittances. Thus, while GST reform may support domestic demand, India faces external risks that require broader economic resilience.
Outlook on Reform and Growth
The GST simplification is a welcome step to ease taxation and support consumption. However, without structural reforms and policy consistency, it may only offer temporary relief. Unlike the 2019 tax cuts, this reform is unlikely to spark expectations of sweeping economic changes. India’s growth trajectory depends on addressing fundamental challenges beyond tax policy.
Questions for UPSC:
- Critically analyse the impact of tax reforms on economic growth and consumer behaviour in emerging economies with suitable examples.
- Explain the role of structural reforms in enhancing export competitiveness and how frictional costs affect India’s global market share.
- What are the implications of geopolitical tensions on India’s trade policies? How can India mitigate risks from external tariff impositions?
- Comment on the relationship between banking sector health and economic growth in India, denoting the effects of rising non-performing assets.
