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Informist, Wednesday, Sept. 10, 2025

 

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--CEA: GST reforms may offset any adverse impact of prolonged tariffs 
--CONTEXT: CEA Nageswaran's comments at All India Mgmt Association event 
--CEA: Net impact of tariffs, GST reforms to be 0.2-0.3% of GDP in FY26 
--CEA: Farm sector has room to contribute 0.5-0.7% more to GDP growth

 

NEW DELHI – The goods and services tax reforms will help offset any adverse impact of the US' tariffs especially if they turn out to be prolonged, by compensating with domestic demand boost, Chief Economic Adviser V. Anantha Nageswaran said Wednesday. On a net basis, the US tariff impact after considering the GST reforms will drag the 2025-26 (Apr-Mar) GDP projection of 6.3-6.8% by 0.2-0.3%, he said.

 

"Because, by substituting domestic demand by whatever export demand may not materialise from the US, what GST reforms does is to alleviate the second and third round effects (of tariffs) by creating domestic demand and threfore removing the uncertaintity that comes from tariff," Nageswaran said while speaking at All India Management Association's 52nd National Management Convention.

 

The GST Council last week decided to overhaul the tax regime by tweaking the four-slab GST structure of 5%, 12%, 18%, and 28% to a two-slab structure of 5% and 18%. The council also introduced a new GST rate of 40%, to be imposed on sin and luxury goods. All new rates, except for those on tobacco products, will take effect Sept. 22. These changes are part of Prime Minister Narendra Modi's next-generation reforms which look at giving support to domestic economy amid global uncertainties.

 

According to Nageswaran, while the hit from US' tariff will be limited in FY26, it is the second and third order impacts that India will have to watch out for, especially if the punitive 25% tariff on Indian goods stay longer than anticipated. Citing displeasure over the high trade gap, the US has imposed 25% reciprocal tariff on India, with an additional 25% as punitive tariff for trading with Russia. 

 

"But in the event that it (tariffs) is slightly longer than we want it to be, especially the penal tariff of 25%, then the second and third round effect will become more pronounced which is the uncertaintity with regards to investment, capital formation and overall sentiment in the economy and that is where the GST reform will play a very important offsetting role," Nageswaran said. "So GST reform contribution is not just in the direct impact from purchasing power by bringing down the price of goods, but more importantly what it does is provide an antidote to second and third round impact," he added. 

 

India's GDP growth rose quicker than expected to a five-quarter high of 7.8% in Apr-Jun, led by higher growth in services and manufacturing sectors, data released by the statistics ministry showed. The Indian economy had grown 7.4% in the March quarter and 6.5% in the year-ago quarter. The US tariff will affect nearly 55% of India's exports to the US, worth almost $50 billion, including chemicals and fertilisers, textiles and apparel, gem and jewellery, shrimp and seafood, furniture and beddings, and machinery and mechanical appliances.

 

The exact impact of tariffs on Indian economy is tough to arrive at, the chief economic adviser said, given the assumptions are "fraught with a wide margin of uncertainity". He maintained the hope that the government expects tariff-related challenges "could be transcient and short-lived rather than long-lived".

 

Speaking about structural reforms in the domestic economy, Nageswaran said that while many initiatives have been started by the Centre to boost agriculture sector, these initiatives are state-level subjects which should be supplemented by them. He noted that agriculture sector still has room to contribute at least 0.5-0.7% more to India's GDP growth and that is a function of giving farmers the right to sell to whomsoever, whatsoever, wherever, and whenever. "That is the kind of freedom that farmers need much more than agriculture subsidies," he said.

 

Farmers also need some element of insurance given their business is inherently prone to ravages of nature and uncertainties. "Empowering farmers and not imposing restrictions in their ability to tap market signals from within India or overseas, these would unleash the productivity in agriculture and add to GDP growth," Nageswaran said.   End

 

Reported by Priyasmita Dutta

Edited by Akul Nishant Akhoury

 

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