Donald Trump has implemented a significant 50% tariff on India, a move that follows his recent executive order imposing an additional 25% penalty on the country for its acquisitions of Russian oil and weapons.
India, recognised as one of the United States’ key allies in the Indo-Pacific region, finds itself among the nations facing some of the highest tariffs globally. The potential impact on exports and growth in the world’s fifth-largest economy is significant, especially considering that the United States was, until recently, India’s largest trading partner.
The recent tariff setback has prompted the Indian government to adopt a reactive approach. Earlier this month, Indian Prime Minister Narendra Modi pledged to reduce taxes in an effort to alleviate their economic repercussions. He has additionally called for a focus on domestic self-reliance.
A Diwali gift described as a “massive tax bonanza” is reportedly on the horizon for the commoner and the millions of small businesses that drive Asia’s third-largest economy, according to statements made by officials.
Clad in a vibrant saffron turban, Modi captivated the audience gathered at the ramparts of Delhi’s Red Fort for the Independence Day celebrations. He called on small shop owners and businesses to display signs proclaiming “Swadeshi” or “Made in India” outside their establishments.
“We must strive for self-reliance, not driven by desperation, but fueled by a sense of pride,” he stated. “The world is witnessing a surge in economic selfishness, and we mustn’t succumb to despair over our challenges. Instead, we must elevate ourselves and resist being ensnared by the actions of others.”
This week, he has reiterated these remarks in at least two additional public addresses.
Observers note that this move is a direct response to Donald Trump’s announcement of a 50% tariff on steel and aluminium imports from India. This decision threatens to impact millions of livelihoods within the nation’s export-driven sectors, which provide a wide array of goods, including clothing, diamonds, and shrimp, to American consumers.
In the face of challenges, Prime Minister Modi has delivered a decisive message to the nation: a call to both manufacture and invest within India.
The situation has become progressively challenging, as the contribution of manufacturing to India’s gross domestic product (GDP) has remained stagnant at around 15%. This comes despite the government’s efforts to implement various subsidies and production incentives over the years.
Implementing long-awaited tax reforms, which would provide immediate financial relief to citizens, could help the government mitigate some of the adverse effects.
Following a $12 billion income tax giveaway revealed in this year’s budget, Prime Minister Modi is now targeting a comprehensive reform of India’s indirect tax system, with a focus on reducing and simplifying the goods and services tax (GST).
The Goods and Services Tax (GST), implemented eight years prior, aimed to streamline a complex array of indirect taxes, thereby lowering compliance burdens and reducing the overall cost of conducting business.
Experts argue that the system is overly complicated due to its numerous thresholds and exemptions. There have been multiple calls for a revamp of the system.
Modi has committed to this end, as India’s finance ministry has released a proposal for a streamlined two-tier GST system.
Analysts from Jeffries, a US brokerage house, commented on the recent announcement, stating that the combination of the income tax cut set to take effect in April 2025 and the GST rate reforms, which are projected to be valued at US$20 billion (£14.7 billion), is expected to boost consumption significantly.
Private consumption plays a crucial role in India’s economy, accounting for nearly 60% of the nation’s GDP. Rural spending, buoyed by a robust harvest, has shown resilience, yet urban demand for goods and services is experiencing a decline. This downturn can be attributed to reduced wages and job cuts in key sectors such as IT in the aftermath of the pandemic.
According to investment banking firm Morgan Stanley, Modi’s “fiscal stimulus” or tax cuts are expected to facilitate a recovery in consumption. The initiative is expected to boost GDP while simultaneously reducing inflation rates.
Morgan Stanley emphasised the importance of this situation, noting the challenges posed by persistent global geopolitical tensions and unfavourable developments related to tariffs that could negatively affect external demand.
Several sectors are poised to gain from the recent tax breaks, particularly those that cater directly to consumers. This includes industries such as scooters, small cars, garments, and even construction materials like cement, which often see an increase in demand as Diwali approaches.
Although the details remain unclear, a majority of analysts project that the revenue decline resulting from a reduced GST will be offset by excess collections from certain taxes and dividends from India’s central bank, which exceed budget expectations.
Swiss investment bank UBS has indicated that the recent GST cuts are expected to generate a more significant “multiplier effect” compared to the earlier corporate and income tax reductions implemented by the Modi government. This is attributed to the cuts’ direct impact on consumption at the point of purchase, which could result in increased consumer spending.
Modi’s tax handouts may heighten the likelihood of additional interest rate cuts by India’s central bank, which has already implemented a 1% reduction in recent months. Analysts suggest that this move could encourage increased lending in the economy.
Analysts suggest that the upcoming salary increase for nearly five million government employees and 6.8 million pensioners, set to take effect early next year, will contribute to sustaining India’s economic growth momentum.
The announcements have been met with enthusiasm in India’s stock markets. Amid the turmoil stemming from trade uncertainties, India achieved a significant milestone earlier this month, receiving a rare sovereign rating upgrade from S&P Global for the first time in 18 years. A sovereign rating assesses the level of risk associated with lending to a government or investing in a particular country.
This development holds considerable importance as it has the potential to reduce the government’s borrowing expenses and enhance the influx of foreign investments into the nation.
Despite Prime Minister Modi’s expedited implementation of long-overdue reforms, India’s growth outlook has markedly diminished from the 8% rates observed in previous years, and the external crisis continues to persist without indication of resolution.
The escalating tensions between Delhi and Washington, particularly regarding India’s energy purchases from Russia, have reached a new peak, leading to the cancellation of trade negotiations that were scheduled to commence earlier this week.
Experts assert that the current 50% tariffs on India resemble a trade sanction between two of the world’s most extensive and most rapidly expanding economies. This situation seemed unimaginable only a few months prior.
