India's GST Reforms to Blunt Impact of US Tariffs
© AP Photo / Altaf Qadri
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"None of this has to do with tariffs," Finance Minister Nirmala Sitharaman told a presser in New Delhi on Wednesday, as she unveiled reforms to the Goods and Services Tax (GST). However, experts told Sputnik India that the new GST rates will help India in countering the blow of tariffs.
Indian businesses will be able to make up in part the revenues lost due to the 50% US tariffs because of the GST reforms set to kick in from 22 September, a foreign trade expert has told Sputnik India.
"According to a rough estimate, nearly $45 billion worth of Indian exports bound for the US are expected to be impacted due to the 50% tariff imposed by the US, which is India's biggest export market," said Professor Debashis Chakraborty, Professor at Indian Institute of Foreign Trade (IIFT).
Comparatively, the sales around Diwali last year, which is a peak business period in India, was around $14 billion, around a third of the losses anticipated due to US tariffs, he noted.
"So, in that sense, going just by sheer numbers, to an extent, we may be able to make up for the lost revenue by further simplifying the GST regime in order to boost domestic consumption," the foreign trade expert estimated.
Chakraborty pointed out that another key factor here was the composition of the Indian export basket to the US, wherein electronics, machineries, gems and jewellery, articles or irons and steels, refined petroleum products, etc lead the pack.
"In terms of major items purchased during Diwali, past domestic buying patterns show that there is a spurt in sales of gems and jewellery, textile and garments, mobile phones, electronics such as TVs, fridges and mobile phones among others," the IIFT professor said.
In that terms, there is a difference in composition of the sectors affected by US tariffs and those expected to benefit from GST reforms, he said.
India's "rationalisation" of the four-tiered tax structure into primarily a two-rate structure of 18% and 5% Goods and Services Tax (GST) brackets, with a 40% rate for a few goods and services, represents a "strategic evolution" of the tax framework, the Finance Ministry has said.
The reforms to the GST structure, first announced by Prime Minister Narendra Modi during his Independence Day Speech last month, will benefit consumers and businesses, including exporters, in the world's biggest market, Commerce Minister Piyush Goyal said on Thursday.
The significance of these reforms, set to kick in from 22 September, lies in the fact that many of the common household and daily-use items in the FMCG sector like hair oil, toilet soap bars, shampoos, toothbrushes, toothpaste, bicycle as well as milk, cottage cheese, snacks will now cost lower. At the same time, costs of TVs, fridges, ACs, small cars and motorcycles will also be lowered due to GST revisions.
Chakraborty remained optimistic that besides benefiting the domestic consumer, the reforms will also benefit export-driven, labour-intensive industries in the Micro, Small and Medium Industries (MSMEs) sector, the second-biggest employer in India after the agriculture sector. These include textiles and garments, gems and jewellery, carpet-making, leather and pharmaceuticals to name a few areas.
"An aggressive diversification of exports to non-US markets, currently being pursued as part of FTA negotiations with a number of countries, is another significant strategy to blunt the impact of US tariffs on Indian industries. In that sense, the GST reforms lower input costs from 12% to 5% in a number of sectors, which will definitely help Indian exports become more competitive as compared to Chinese or Southeast Asian exports," the Indian expert explained.
He reckoned that the biggest beneficiary of these reforms might be the Indian middle-class, the largest of any nation, as they would have more spending capacity, likely boosting consumption.
"While India's middle-class definitely boosts India's domestic consumption prospects as compared to an export-driven economy like China, what we have witnessed in recent years is that job-creation growth has been modest. There are many contractual jobs being created. So, there is a difference in spending pattern between a salaried person, which is more sustained, and that of a contractual worker, which is generally driven by impulse. That's an important differentiation when we analyse the spending habits of the Indian middle-class under current circumstances," Chakraborty flagged.
Meanwhile, Ashwani Mahajan, the Co-convenor of economic advocacy group Swadeshi Jagran Manch (SJM), described India's domestic market of 1.4 billion, with the world's biggest middle-class and youth populations, as a "solid bulwark" against the global tariff onslaught unleashed by the US.
"We have had detailed discussions with many exporters in recent weeks and they have been demanding discounts on costs of manufacturing inputs and other costs. We have also been informed by some Indian exporters that the US importers have been seeking reduction of costs in order to compensate for US tariffs to a degree, which have increased costs in their domestic market," Mahajan told Sputnik India.
He said that major relief was expected for the MSMEs, the backbone of the Indian economy, as well crucial sectors such as the pharmaceutical industry, noting that the GST rates for 33 life-saving drugs and medicines has been slashed to zero altogether.
"From the point of view of Indian middle-class and household budgets, most of the FMCG items earlier in the 12% category have now been re-bracketed in the 5% category or even zero category. In essence, the GST reforms will not only help cool down inflation further by spurring domestic demand, but also bring down the production costs and expectedly boost exports," Mahajan said.
Mahajan credited the government and the Reserve Bank of India (RBI) for taking a series of policy steps to boost consumption in the middle-class, starting from the revision of the Income Tax (IT) slab in the Annual Budget to repo rate cuts of 100 basis points and now the GST reforms.
