Trump’s tariff pains, Modi’s GST relief: Govt gives a reform armour to every Indian

When US President Donald Trump doubled tariffs on Indian goods to 50%, concerns rippled through India’s export sectors. Economists warned of slower GDP growth, potential layoffs in labour-intensive industries like textiles and gems, and broader effects on global trade sentiment.

At a critical moment, New Delhi rolled out a domestic reform that couldn’t have been timed better: a sweeping overhaul of the Goods and Services Tax (GST).

Prime Minister Narendra Modi’s “GST 2.0,” first hinted at from the Red Fort on Independence Day, has now taken full shape following the 56th GST Council meeting in New Delhi.

The reforms are a politically astute and economically potent reset, aimed at strengthening India’s domestic consumption engine. Finance Minister Nirmala Sitharaman emphasised that the changes were not a knee-jerk response to US tariffs.

“The two-tier Goods and Services Tax (GST) structure (plus a ‘sin goods’ slab) announced on Wednesday has not been influenced by the tariffs imposed by the US on India,” she said, adding that the work had been underway for over a year and a half.

Still, the timing is significant. While exports face new challenges, the Modi government is boosting household and small business purchasing power.

The GST reforms simplify the tax regime: the four existing GST slabs are now consolidated into 5% (merit rate) and 18% (standard rate), with a punitive 40% slab for sin and luxury goods.

Domestic consumption as a buffer

India’s economy is largely driven by domestic consumption. According to the Ministry of Commerce, private spending accounts for around 61% of GDP, meaning most economic activity comes from people buying goods and services at home rather than relying on exports. For perspective, exports to the US total $87.4 billion, just 2% of India’s overall output.

This reliance on internal demand makes India more resilient to external shocks like trade disputes or tariffs. It helps explain why India is expected to remain one of Asia’s fastest-growing emerging markets over the coming decade, with GDP projected to stay above 6% even as US tariffs weigh on export growth, according to BMI, a Fitch Solutions company.

The firm noted that Prime Minister Modi’s reforms could largely offset the impact of these tariffs.

Recent data supports this optimism.

The economy expanded 7.8% in the April–June quarter, the fastest pace in over a year and well above the 6.7% median forecast in a Bloomberg survey of economists. As Manoranjan Sharma, Chief Economist at Infomerics Valuation and Ratings, explains to the Mint: “While the US tariffs may slow exports, India’s domestic reforms strengthen household spending and act as a buffer against external shocks.”

GST 2.0 set to put more money in families’ pockets

Government tax reforms are central to this domestic buffer.

As per an SBI Research report, combined GST and income tax cuts could inject roughly ₹5.31 lakh crore ($60 billion) into the economy, with ₹1.98 lakh crore ($22 billion) coming directly from GST cuts on everyday household goods.

Economists at Elara Capital estimate that this extra spending could add 100–120 basis points to GDP growth over the next 4–6 quarters, effectively neutralising the negative impact of higher US tariffs.

Finance Minister Nirmala Sitharaman informed that the GST overhaul carries revenue implications of ₹48,000 crore. The simplified tax structure, with lower rates, is expected to fuel consumption across sectors like automobiles and FMCG.

Fitch has previously noted that while GST contributes about 30% of total revenue and 2.5% of GDP, a temporary drop in collections of $13–20 billion annually is a manageable trade-off for the expected boost to domestic demand.

Despite global trade tensions, India’s domestic consumption engine remains robust.

BMI forecasts real household spending to grow 6.9% year-on-year in 2025, supported by low inflation (1.55% in July 2025) and a resilient labour market (unemployment at 5.2%).

Even in 2026, household spending is expected to grow by 5.5%, reaching Rs 244 lakh crore. Consumer confidence has rebounded sharply: the Current Situation Index stood at 96.5 in July 2025, while the Future Expectations Index reached 124.7, comfortably above pre-pandemic levels.

Rising confidence across urban, semi-urban, and rural India is expected to fuel discretionary spending on big-ticket items such as cars, housing, and travel.

As per Achal Chawla, Tax Partnet at EY, “a 5 to 6% reduction in monthly budget is expected for rural areas. And for urban this might be slightly higher, in the range of 7 to 8% real savings for families.”

GST 2.0: What gets cheaper

The GST Council’s reforms cut rates across multiple sectors, directly benefiting households and businesses:

• Food and daily essentials: UHT milk, butter, ghee, paneer, cheese, sugar, chocolates, nuts, and pre-packaged foods like namkeens and pasta move to 5% or are tax-free.
• Healthcare and education: Life-saving drugs, certain medical devices, and educational materials such as books and learning aids attract 5% GST or zero.
• Consumer goods: Electronics, footwear, and textiles see rates cut to 18% or 5%, while paper products like notebooks drop to nil.
• Automobiles: GST on small cars and motorcycles up to 350cc reduces to 18% (from 28%), car parts are uniformly taxed at 18%, and EVs remain at 5%.
• Other sectors: Cement, renewable energy devices, fertilizers, handicrafts, and select construction inputs now attract 5% GST.

What remains expensive

• Sin and luxury goods: Pan masala, gutkha, cigarettes, aerated drinks, and high-end cars remain at 40% GST. Some products are now valued on retail sale price to curb evasion.
• Energy and services: Coal rises from 5% to 18%, and certain restaurant and lottery services face redefined rules.

Trump’s tariffs represent an external squeeze. Modi’s GST relief is a domestic shield.

While exports face headwinds, India’s consumers are being empowered to sustain growth from within. GST 2.0, effective September 22, provides immediate relief to households, farmers, small traders, and labour-intensive industries.