Arun Kumar
The recent Goods and Services Tax (GST) rate cuts in India have come against the backdrop of U.S. President Donald Trump’s penal tariffs. On August 7, Trump signed an executive order imposing an additional 25% tariff on certain Indian goods so that these exports would now face at least 50% tariffs, compared to 30% on Chinese exports and 19% on Bangladeshi exports. Naturally, India’s competitors stand to benefit, while Indian exports would decline sharply.
The Indian government feared that reduced exports would lead to a decline in demand, especially in labour-intensive sectors Like apparel, textiles, shrimps, and gems and jewellery with a potential loss of $47 billion. This would have a ripple effect on employment and the wider economy, leading to a further decline in demand and an economic slowdown. To counter this, the government turned to GST cuts. The logic was simple: GST Is an Indirect tax. By Lowering it, prices would fall, demand would rise, and the economy would find a new source of momentum.
Why the GST Cuts May Not Work
Revenue Loss vs. Export Loss:
According to the Ministry of Finance, the GST cuts will result in a revenue loss of P48,000 crore in 2023-24. But India’s export loss due to U.S. tariffs alone is estimated at P4.4 lakh crore -almost ten times higher. So, a small revenue sacrifice cannot possibly increase demand enough to compensate for a massive decline in external demand.
Ripple Effects Beyond the U.S. :
USA has not only raised tariff against India but also on imports from the EU, Japan, South Korea, China, etc.. So, many of these countries would have surplus goods which they would try to sell in other markets. Indian exporters are already facing heat in markets like the EU. Reports from Ludhiana already suggest problems for textile exporters facing intensified competition from China and Bangladesh. Thus, the overall export loss will far exceed P4.4 lakh crore.
Investment Decline in an Uncertain World:
Global uncertainty is discouraging investment. As tariffs and dumping fears spread, all countries may face declining exports, reduced demand, and weaker investment. India’s stock markets have already seen capital outflows, the rupee has weakened, and net FDI has declined by 97% in recent months. These trends point toward stagflationary conditions in the world in coming times.
Organized vs. Unorganized Divide:
GST applies mainly to the organized sector. A rate cut lowers prices there but leaves the unorganized sector unaffected. This further tilts the playing field towards the organized sector, which already benefited from GST at the cost of micro and small businesses. As demand shifts away from the unorganized, labour-intensive sector, unemployment will rise, further depressing demand. In brief, the increase in demand in the organized sector due to GST rate cut is likely to be overwhelmed by the decline due to exports and setback to the unorganized sector.
The Larger Policy Problem
Thus, government’s approach continues its policy of benefiting the organized sector at the expense of the unorganized sector, where 94% of India’s workforce is employed. This has been undermining internal demand and worsening inequality.
Moreover, the idea of going ‘Swadeshi or fully self-reliant is unrealistic. Today, India is very dependent on imports. For instance, India imports from China critical inputs for domestic production and exports and has a rising trade deficit with it which has reached $100 billion. Shifting to internal production will require development of technology which will take time. Development of new markets and supply chains requires new distribution networks and long-term relationships.
A Way Forward
If India wants to strengthen internal demand, the focus should be on: Enhancing purchasing power in the unorganized sector, consisting of agriculture and micro and small enterprises. Investment has to be increased in agriculture, education, health, rural development and R&D. And, rising inequality need to be checked. The organized sector already has strong balance sheets, but it will investment more only if there is sufficient demand. That demand will not come from GST cuts but from empowering the vast majority of Indians who form the backbone of the economy.
The GST rate cuts may have been intended as a quick fix to offset export losses, but they risk worsening inequality and deepening unemployment due to the adverse Impact on the unorganized sector thereby lowering demand. Instead, India needs a policy reset that prioritizes the unorganized sector and builds resilient domestic markets. Without this shift, the economy will continue to face the twin challenges of external shocks and internal imbalances.
Arun Kumar is a retired professor of economics at JNU and the author of Black Economy in India, published in 1999, 2002 and 2017.
The article was first published in Bank Beats, Volume I, Issue 4 as GST Rate Cuts Amid Global Tariffs: A Misguided Step? on 30th September, 2025.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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This article was posted by Varisha Sharma, a research intern at IMPRI.
