Will GST reforms help Indian exporters weather Trump tariff turmoil?
Good morning. As Veena mentioned on Friday, Andres Schipani and I will be filling in for her this week as she is off gallivanting in Europe, so bear with us if we can’t match her award-winning wit and style.
The weekend was largely news-free in India, but what drew attention was a softening of rhetoric between the Indian and US leaders. Donald Trump told the press that he would “always be friends” with Prime Minister Narendra Modi, just a day after the US president had moaned that India was lost to China. Modi responded by saying he deeply appreciated and fully reciprocated Trump’s “positive assessment” of bilateral ties.
Many see this as a potential off-ramp for the spiralling of a once blooming relationship. But nobody in New Delhi seems to really know what the man in Washington is thinking. Let us know if you feel the geopolitical pundits are overthinking this exchange.
From India, we are working on stories about global artificial intelligence giants looking at India as a new battleground and the growing EV race in two-wheelers, and Andres, who has just come back from a week of reporting in Dhaka, will have more to share on Friday.
‘Tirade of tariffs’
Tariffs and taxes continue to dominate most conversations in India, with government officials hoping that the rationalised rates of Goods and Services Tax (GST) will cushion some of the economic impact of Trump’s 50 per cent tariffs.
The country’s chief economic adviser V Anantha Nageswaran said at an event in Mumbai on Friday that the new GST rates will give consumption a fillip. But whether the effective tax cut will be significant enough to fully offset export losses from tariffs is a “matter of calculations”, he said. Finance minister Nirmala Sitharaman also told local media over the weekend that the government was working to provide support to sectors worst-hit by the “tirade of tariffs” and would not leave the exporters “high and dry”.
While daily essentials are direct beneficiaries of the reduced taxes, sectors such as gems and jewellery, one of the most badly affected by US tariffs, will find some relief from slashed rates on imported diamonds and jewellery boxes. Similarly, taxes on auto parts — another sector that exports heavily to the US — have also been reduced, which can ease production costs for carmakers. However, India’s largest export is not goods, but services, led by the nearly $300bn IT services. Trump’s trade adviser Peter Navarro, who has repeatedly attacked India for its Russian oil imports, recently advocated for tariffs on “all outsourcing”. Any action on that will make India’s troubles even more dire. New Delhi nevertheless seems to remain hopeful of resolving issues with Washington.
The tariffs affect more than half of India’s over $85bn annual exports to the US, and Nageswaran has estimated that if they continue, GDP growth could be pulled down by 0.5 to 0.6 percentage points. This makes domestic growth all the more crucial, and the government hopes the cuts to GST — a nearly Rs480bn ($5.6bn) hit to tax revenue — will help. But with wages across most sectors largely stagnant over the past five years, and concerns about a slowing economy, consumers could still hold back — that is, if the private sector even passes on the tax cuts in the first place.