India’s Goods and Services Tax (GST) Council announced a major simplification of tax slabs in September 2025. The system moved to two main rates – 5 per cent and 18 per cent. Essentials like foodgrains and fresh produce remain exempt. This reform follows Prime Minister Narendra Modi’s promise to ease the tax burden and stimulate growth. The aim was to boost consumption and counter the impact of rising US tariffs on Indian exports. However, early market responses and economic estimates suggest limited impact on growth.
Recent GST Rate Changes
From September 22, 2025, India reduced GST slabs to two broad rates. The 5 per cent slab covers many goods previously taxed higher. The 18 per cent slab includes most other goods and services. Essentials remain exempt to protect consumers. This simplification was intended to reduce compliance complexity and ease tax burdens.
Impact on Consumption and Economy
Private final consumption expenditure (PFCE) forms 60 per cent of India’s GDP growth. Lower GST rates were expected to increase spending and boost GDP. However, only about 11 per cent of consumption is affected by the cuts, mainly processed foods and consumer durables. The estimated increase in spending is around 0.2-0.3 per cent of GDP, a modest rise unlikely to drive growth.
Market Reaction to GST Cuts
Stock markets showed little enthusiasm after the GST announcement. Key consumer goods companies like Nestle and Hindustan Unilever saw flat or falling stock prices. Consumer durables firms also failed to gain. Only carmakers like Maruti and Hyundai maintained some gains. Overall, investors appear sceptical about the reform’s growth impact.
Strategic Objectives Behind GST Reform
The GST cuts aimed to revive growth amid public frustration over multiple taxes. They also sought to counterbalance US President Donald Trump’s 50 per cent tariffs on $50 billion of Indian exports. The government hoped to boost domestic demand as export markets shrank. Politically, the move aligned with the aatmanirbhar (self-reliance) policy promoting national consumption.
Limitations of GST Cuts as Growth Strategy
GST reform alone cannot offset export losses or raise consumption. Raising consumption beyond 60 per cent of GDP requires deeper tax cuts, which states cannot afford. Much of India’s consumption leaks to imports, especially from China. The government’s focus remains on heavy taxation to fund infrastructure and social programmes.
India’s Export Growth Challenge
Long-term growth depends on export-led industrialisation. East Asian economies like Japan, South Korea, and China achieved prosperity through decades of export growth. India has not made exports a national priority despite having skilled labour and English fluency. The US tariffs expose India’s vulnerability due to lack of export diversification and trade deals.
Future Export Potential and Policy Needs
India can compete in low-value exports like textiles and steel and in high-value sectors like chemicals and pharmaceuticals. Achieving export power requires focused, goal-oriented policies and investments. Learning from East Asian models, India could become a major export hub in 10 years. Economic strength will come from manufacturing scale and quality, not political posturing.
India’s Global Positioning
At the 2025 Shanghai Cooperation Organisation summit, India displayed defiance towards US trade policies. However, global respect depends on economic power, not rhetoric. India’s future lies in building factories that produce for world markets. Sustained investment and export focus will drive India’s rise on the global stage.
Questions for UPSC:
- Point out the economic impacts of Goods and Services Tax (GST) reforms on India’s consumption and growth.
- Underline the role of export-led industrialisation in the economic development of East Asian countries and critically analyse its applicability to India.
- Critically analyse the challenges faced by India in countering protectionist trade measures like US tariffs and estimate the effectiveness of domestic demand as a shield.
- With suitable examples, explain the relationship between tax policies and infrastructure development in India and point out how this affects overall economic growth.
