GST reforms aim to ease the impact on the Indian economy. This impact would result from 50% US tariffs on exports. Still, that’s a delicate balance to strike. US Tariffs on any has forced finance ministry to bring forth India’s biggest tax overhaul since 2017. That’s set to shape the country’s GDP growth, its inflation trajectory and fiscal deficit for years to come.
In essence, GST reforms are a cushion to the blow. The Indian economy would take this blow due to Trump’s tariff tirades over the purchase of Russian oil. SBI Chief Economist Soumya Kanti Ghosh told Reuters, “The consumption boost from the GST rate rationalisation will be significant. It will more than neutralise any possible revenue impact.” “The impact on fiscal deficit will be almost insignificant or even positive.”
GST Reforms will boost GDP
Ghosh had previously pointed out that GST reforms alone can add 60 basis points to India’s GDP print. This increase will happen over the next 12 months. This contrasts with US tariffs that can dent growth by up to 1 percentage point over time. This information was reported by Reuters on 21 August citing an MUFG analysis. One basis point is one-hundredth of a percentage point.
“Lower GST rates will be positive for growth in the second half of the year.” This was stated by DBS Group Research’s Senior Economist Radhika Rao in a note. She added that changes will also expand the size of the formal economy.
The GST rate cuts are expected to put more disposable income in the hands of consumers. This is intended to lift consumption, which accounts for 60% of India’s GDP. According to Revenue Secretary Arvind Shrivastava, the changes will have a net impact of ₹48,000 crore on revenues. However, they will be fiscally sustainable.
Also read: Simplified GST Ahead: Two-Slab Tax Model to Benefit Common Man, Farmers & MSMEs
GST Reforms aims to push consumption
Economists expect this tax relief to deliver a consumption push, with Reuters estimating the move could shave up to 1.1 percentage points off CPI inflation. Lower prices typically spur real consumption, and analysts project 30-70 bps boost to GDP growth in FY26. Sectors such as autos, cement, and consumer durables are seen benefiting most.
On the flip side, the rate cuts mean a direct revenue loss of around ₹48,000 crore, about 0.13% of the gross domestic product. While higher GST buoyancy—monthly collections have been averaging ₹1.8-1.95 lakh crore—could offset part of this, the fiscal math will tighten in the short term.
Without spending cuts or efficiency gains, the fiscal deficit could widen from the budget target of 4.4% to 4.5-4.6% of GDP.
US Tariffs to Impact Exports, Rupee
The US is India’s largest export destination, with shipments worth $80-87 billion in FY25, or about 2-2.5% of GDP. Citigroup Inc. estimates that the combined 50% US tariff poses a 60-80 bps downside risk to India’s annual GDP growth.
The rupee has already come under pressure, sliding to record lows on fears of export losses and capital outflows. A weaker currency raises import costs, particularly for crude oil and electronics inputs, adding 10-30 bps to retail inflation.
Taken together, the GST reforms and US tariffs pull the economy in opposite directions. GST rate cuts add to demand, while tariffs sap exports and weaken the rupee. It’s worth noting here that India’s GDP growth rate rose to highest in at least a year to 7.8% in April-June 2025. That was before US tariffs took effect and GST reforms were announced.
GST Reforms to have Positive Impact
Finance Minister Nirmala Sitharaman assured that the GST reforms were not influenced by the tariff turmoil. She said they will have a “very positive” impact on India’s GDP. “We believe GST is not a static situation—when rates come down, buoyancy goes up,” Revenue Secretary Shrivastava said. “We expect people to come out and buy more when taxes are reduced.”
If India can ride out the export shock while boosting consumption through GST reforms, it could emerge stronger. In the short run, policymakers must support consumption. They also need to manage the currency. Additionally, they have to keep the fiscal roadmap credible.
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