NEW DELHI: The goods and services tax (GST) reforms will help offset some of the adverse impacts of steep tariffs of 50 per cent imposed by the US on Indian shipment and the net impact of this on the GDP growth would be 0.2-0.3 per cent in the current financial year, Chief Economic Adviser V Anantha Nageswaran said on Wednesday.
On the positive side, he said, the GST reforms will play a very good offsetting role by substituting domestic demand for whatever export demand that may not materialise from the United States.
The GST Council last week decided to overhaul the tax regime by tweaking the four-slab GST structure of 5 per cent, 12 per cent, 18 per cent, and 28 per cent to a two-slab structure of 5 per cent and 18 per cent. The council also introduced a new GST rate of 40 per cent, to be imposed on sin and luxury goods.
GST reforms will help alleviate the second and third round effects by creating domestic demand and therefore removing the uncertainty that will come in the way of capital formation, he said while addressing an event organised by AIMA.
“Although you must remember that for the first five months of the current financial year, exports of goods to the US have almost already achieved half the number of last year. So in other words, in this financial year, the impact may be relatively limited, depending on the assumptions one makes, but the more important thing is the second and the third round effects of the uncertainty of tariff, provided they last longer,” he said. He exuded confidence that the tariff situation will turn out to be transient and short-lived, rather than long lived.
“But in the event that it lasts longer than we want it to, especially the penal tariff of 25 per cent, then the second and third round effects will become more pronounced, which is the uncertainty with respect to investments, capital formation, overall sentiment in the economy,” he said.
However, Nageswaran said GST reform would not only boost domestic consumption but more importantly it provides an antidote to the second and third rounds of tariff impact.
“So net-net, I think if you take the GST into consideration, the impact of tariffs and the compensating effects of GST, rate reductions and process reform could probably give us a 0.2-0.3 per cent on a net basis, in terms of drag on the GDP estimates that we have of 6.3 to 6.8 for the current financial year,” he said.
The sectors impacted due to high import duties include labour-intensive segments such as textiles/clothing, gems and jewellery, shrimp, leather and footwear, animal products, chemicals, and electrical and mechanical machinery.
Sectors such as pharma, energy products and electronic goods are out of the ambit of these sweeping duties.
The US accounted for about 20 per cent of India’s USD 437.42 billion worth of goods exports in 2024-25.
The US has been the largest trading partner of India since 2021-22.