GST reforms vs US tariffs: What it means for India's GDP, inflation, fiscal deficit

India's biggest tax overhaul since 2017 is colliding with the steepest US tariffs on any nation. That's set to shape the country's GDP growth, its inflation trajectory and fiscal deficit for years to come.

A woman working at a textile unit in India(HT_PRINT)

In essence, GST reforms are a cushion to the blow that the Indian economy would take due to Trump’s tariff tirades over purchase of Russian oil.

“The consumption boost in lieu of the GST rate rationalisation will more than neutralise any possible revenue impact,” SBI Chief Economist Soumya Kanti Ghosh told Reuters. “The impact on fiscal deficit will be almost insignificant or even positive.”

Ghosh had previously pointed out that GST reforms alone can add 60 basis points to India’s GDP print over the next 12 months, as against US tariffs that can dent growth by up to 1 percentage point over time, Reuters reported 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,” DBS Group Research’s Senior Economist Radhika Rao said in a note, adding 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 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, but will be fiscally sustainable.

GST Reforms, A Booster Dose

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, a drag on 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.

Policy Moves

To be sure, Finance Minister Nirmala Sitharaman said the GST reforms were not influenced by the tariff turmoil, and 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.”

ALSO READ | New GST rates: Full list of items that received rate cuts

If India can ride out the export shock while boosting consumption through GST reforms, it could emerge stronger. But in the short run, policymakers face a delicate balancing act between supporting consumption, managing the currency, and keeping the fiscal roadmap credible.